LAS VEGAS–Examiners may tell smaller CUs “don’t do this” when it comes to small business lending, but several people say the warning should be ignored, as they are using CUSOs to carve a niche in high-yielding MBLs and protect share in a market fiintechs are increasingly eager to gobble up.
That viewpoint and others were shared during a session at NACUSO’s Network meeting in Las Vegas. Sharing their experiences were Kevin Scott, CEO of Las Colinas FCU in Irving Texas; Ken Sessions, president and CEO of CU Evolution Denton, Texas CUSO; and Dave Waller VP-Sales with JUDI.AI in Austin, Texas
CU Evolution is an MBL CUSO owned by five credit unions. JUDI.AI provides the loan decisioning technology behind the CUSO’s underwriting, where the standards are set by each individual CU.
Small business is a discrete but distinct market segment, noted Waller, pointing out that more than 90% of business have less than $5 million in revenue annually and fewer than 10 employees. They often need conventional C&I loans of $250,00 or less, he said.
The size of the market, according to pre-pandemic 2019 data, is shown in the slide below.
“There is a market out there that is ripe for you guys, that the banks are not going after. Every small business has a consumer behind them, and many of them are your members,” said Waller.
Waller said while many of the currently outstanding business loans and lines of credit were originated on the traditional banking side, he sees the market headed toward fintech lenders that bring speed and efficiency to the lending process.
He noted, for example, Square Finance in 2022 did more than $4 billion via 461,000 loans, are at 66% annual growth over the prior year.
That’s about $9,000 per loan, he said.
“They are taking market share. I would bet many are members of your credit unions.”
Waller said JUDI.AI believes small business lending is what he called the “underserved middle.” Many of these are small dollar loans, have a low credit score hit rate, have unreliable financials and a high failure rate, he added.
Reminder Often Needed
Sessions, meanwhile, said many business owners must still be reminded that a credit union also makes business loans. Many of those business owners have watched as their banker has moved around, and they want to keep their business at one place. The education is a key challenge, he said.
Los Colinas Credit Union has about $100 million in assets, with about 50% of its membership community based. The Irving, Texas, market has what Scott referred to as many “economically repressed” businesses that are not of much interest to larger financial institutions.
Both Scott and Sessions participated in a Q&A with Waller during the session.
Waller: You are new to member business lending? What has been your experience in a market with a lot of competition?
Scott: It’s been a wonderful experience. We’re passionate about the CUSO experience. It’s loan portfolio diversification. It’s excellent yielding loans. It’s 8% plus a processing fee. One of the biggest challenges we face from a small credit union perspective is the fear factor that goes into small business lending. You’re told by the regulator you’re not large enough to take on this lending, don’t have the experience. The CUSO has allowed us to solve for many of these issues.
Waller: What does success look like to you?
Scott: You can become addicted to this very quickly. It can balloon on you rapidly. We are sticking our toe in the market, with 5% of our portfolio in 2023 in small business lending, with an ultimate goal of 15%-20%.
Waller: How does your three branch strategy fit in? (Los Colinas has three branches).
Scott: My branch strategy is a digital first strategy. We believe that’s how people want to interact with their credit union. You have to have an excellent digital storefront. We are not investing in more branches. We are trying to invest rapidly and seriously in the digital presence.
Waller: How did CU Evolutions come about?
Sessions: I was working for a smaller credit union, about $15-$18 million, and they recognized their current business model was not sustainable. They were living in the historical credit union world. They were rocking along at breakeven, with no growth. They decided to step into member business lending world.
They did it the more traditional way by hiring a commercial lender. It was great; they doubled in size in five years. But you can get addicted to that.
Waller: What were pro’s and con’s of CUSO approach?
Scott: The CUSO lends itself to the ability to buy a slice of the pie. We gain all that experience and expertise without the heavy overhead. And if we could hire a person, we would be held (hostage) by that person (potentially) leaving. The CUSO makes available redundant resources.
The other pro’s in using the CUSO is the fact this is heavily regulated type of lending. You have to have strong compliance support. The CUSO brings to the table not just policy and procedure and highly vetted documents, you also gain a compliance officer. They show up at NCUA examinations. It’s a wonderful benefit and solves a challenge smaller CUs have.
And the price on member business loans is another of the advantages.
Waller: What are the key ingredients of a successful small business lending program?
Sessions: Willingness. NCUA will come into a smaller CU and say, “Smaller CUs just don’t do this.” We do, and we do it well. Size in this situation, with seven together, gives us economies of scale. We can act like a big shop. Our smallest credit union is at $24 million in assets and they can act like they are a $500 million shop and do things just as well as they do.
Waller: What holds a credit union back?
Scott: It’s fear. It’s not really complicated from a small CU perspective. You are beaten down from stepping into these waters. The board has a lot of questions. You don’t want to face the regulators with the questions in this realm.
Waller: The small mom and pops are everywhere. What about the loans?
Sessions: You’re still underwriting a business. You have to have sound underwriting processes. Technology has sped up the process for us. I look at our partnership with JUDI.AI as another employee of the CUSO.
Scott: The software solution is as critical for us. We didn’t want to have multiple people. JUDI.AI has sped things up significantly. We have to have the speed or we’re going to get left behind. Speed has become the most precious commodity. Giving that time back to people is a great value-add.
Sessions: The credit union strategic advantage is always going to be speed to market. The community banks take time. We understand the market, we understand the member. The member will pay a premium for that quick answer. That and collaboration are our super-powers.
Waller: What is the process? I want a small business loan, what do I do?
Session: JUDI’s software resides at the CUSO level. They go through the application and the decision is made at the credit union level, with a recommendation from JUDI.AI with the CUSO’s underwriting laid over it. Where we divert is the documentation piece. Because we have multiple owners, the credit unions use their own documents. That’s the solution that worked for our group.
It’s Called Fresh for a Reason. And We Offer Home Delivery. For Free!
The biggest, best and freshest news reporting in credit unions remains free in ’23! Each morning CUToday.info delivers its daily Fresh Today news update offering the latest headlines and breaking news right to your email, with the easy-to-read headlines format allowing you to click on the stories that interest you most in order to learn more.
If you haven’t yet signed up for the new email solution on which CUToday.info has partnered with ResponseGenius, you can do so here. Signing up requires less than one minute of your time—and it’s free!
Please note that after signing up you may need to go to your Spam/Junk folder and mark the morning headlines email as safe. CUToday.info does not provide its list of readers and emails to outside parties, and we will not be contacting you to sell you an extended warranty or sending you any links so you may cash in on an inheritance you didn’t know was coming.
And did we mention it’s free?
Please note and/or make your IT department or email administrator aware the emails will be coming from the domains CUTodayinfo.com and CUTodayinfoReply.com