By Ray Birch
LOMBARD, Ill.—It’s time credit unions improve their processes for making small business loans if they are to capitalize on the growing MBL demand, says Raddon.
And that could mean partnering with fintechs to help CUs with lending efficiency, emphasized Greg Ulankiewicz, Raddon senior research analyst.
“Credit unions need to improve their processes to get their lending costs down so they are able to make loans to small businesses at the rates, terms and conditions that so many small businesses are looking for,” Ulankiewicz advised.
According to Ulankiewicz, ever since the Great Recession pushed big banks out of the small business lending market, credit unions and other community lenders have tried to fill the void and take advantage of the growing opportunity. But Ulankiewicz noted credit unions, for the most part, have not been able to improve their small-dollar business loan processes to lower their internal costs and, in turn, price rates lower. That has led many entrepreneurs, he said, to seek other methods of financing, such as credit cards.
Fintechs have led the way in improving speed and efficiency for small-dollar loans, but they have not been able to make strong inroads into financial services—and therefore small business lending—since they lack the consumer trust banks and credit unions have, nor the connection to local communities, Ulankiewicz explained.
“We certainly think a great approach for credit unions is to learn from and partner with fintechs rather than view them as a disruptor or threat,” said Ulankiewicz. “Fintechs are really showing the way in terms of lending technology, to the extent credit unions can apply that tech to their own processes. They have the advantage of the community relationships that fintechs don’t, and fintechs have the technology and processes CUs don’t—marry those things together. Credit unions can make inroads into small business lending this way.”
Banks Expected to Remain Absent
Ulankiewicz said banks exited the small-dollar small business lending market because they, too, did not have the processes to offer rates startups were willing to pay, and the small-dollar loans banks had been making were largely marginally profitable. He said he does not expect banks to re-enter this market any time soon.
“The banks just diverted their resources elsewhere,” he said.
But this market presents a large opportunity, as the credit union movement has recognized. NCUA in recent years has expanded credit unions’ ability to make
business loans.
Raddon reports:
- 48% of small businesses are planning to take out a loan in the next 12 months—the highest percentage since 2012
- 65% of small businesses anticipate an increase in sales, compared to just 5% that expect a decrease
- Small business economic confidence ratings outpace those of consumers by more than two times (43% vs. 21%)
What Credit Unions Must Do
Ulankiewicz outlined what credit unions must do to take advantage of the need for small business loans.
“It comprises three things,” he said. “The first is segmentation. One of the big things we see is credit unions are applying the same processes they use for large-dollar loans to small-dollar business loans. That creates inefficiencies and challenges. By segmenting the loan by request size and risk they can divert fewer resources to those smaller loans and spend more resources in larger loans.”
Ulankiewicz emphasized he is not recommending credit unions take their hands off the wheel on small-dollar loans.
“You support that segment by investing in additional market intelligence—so data about what is going on in certain small business industries, in certain small business markets, and in certain nearby counties to help inform your decisions so you can make them faster,” he said.
Partnering With Fintechs
He restated technology is a key, such as partnering with fintechs.
“A lot of manual and human resource intensive efforts are going on with these loans, a lot of manual data collection and data entry,” Ulankiewicz said. “Unfortunately, a lot is still being done on paper. So this comes down to segmentation, market intelligence and better use of technology. Those three things will streamline small business lending for credit unions so they can improve efficiencies and offer small business loans at rates small businesses can afford. We have seen credit unions making inroads into small business lending since the Great Recession, but most have yet to make their processes slick enough to make real hay in this space.”