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Lending & Credit Risk

How to Increase Member Business Lending

Kylee Wooten
November 6, 2019
Read Time: 0 min

Key Takeaways

  1. Credit unions' small business loans hit a record low, while small business lending continues to remain strong at big banks and community banks.
  2. Going digital can help reduce the cost of small business lending and capture more member business loans.
  3. SBA loans do not count against the MBL cap and can be a great way for credit unions to support local businesses and entrepreneurs. 

Credit unions' small business loans at a record low

Credit unions’ approval rates for small business loans dropped to 39.7% in September 2019 – a record low, according to the Biz2Credit Small Business Lending Index.

For big banks and community banks, on the other hand, small business lending approval rates remains strong. Following the recent Fed announcement that interest rates would drop, business lending will likely continue to grow for these banks in 2019.

“Other categories of lenders are all moving to digital applications. I would say that credit unions have lost their way in small business lending in today’s low interest rate environment,” said Rohit Arora, CEO of Biz2Credit, in a press release. “Banks and institutional lenders are more aggressive in small business lending.”

Despite the fact that credit unions’ member business lending (MBL) is capped at 12.25% of assets, there are several key areas to bolster this segment and serve more members. Not only is small business lending a critical portfolio to capture for business, but it also helps to support credit unions’ mission to support local businesses and communities.

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Going digital to remove barriers to entry and capture more business lenders

As Arora noted, many lenders are leveraging digital applications in order to make lending more profitable and efficient. The MBL cap limits the amount of business loans a credit union can make, but for some credit unions, the restriction has also become a barrier to entry. Because of this cap, some credit unions are reluctant to invest time and resources to set up small business loan programs.

In order to be successful at business lending, it’s important for credit unions to focus on areas that it does have control over: Processes. Digitizing and automating the business lending process allows for credit unions to drastically improve time- and cost-savings. From online loan applications to automated loan decisioning, today’s technology enables credit unions to make lending decisions quickly and support greater loan volumes.

If all loans require the same amount of time – regardless of size – your credit union has very little incentive to make small business loans. For some credit unions, a $20,000 loan and a $2,000,000 loan may go through largely the same origination process, resulting in the cost to originate the loan to outweigh the benefit. Technology allows for credit unions to streamline their lending process by electronically spreading tax returns, reducing and eliminating manual data entry, automatically scoring and decisioning loans, and more. Business loans can be some of the most paperwork-intensive loans offered, and these technologies allow for credit unions to scale business loans in order to make them profitable investments for their members. 

Technology isn’t just important for making business loans more efficient. A key area of digitization in increasing business lending is a customer relationship management (CRM) system. Members want decisions fast, and in this day and age, instant gratification outweighs a member’s loyalty to his/her credit union – you can’t wait on a member to come to you. Relationship management software enables credit unions to capture a 360-degree view of each member and loan. Rather than waiting for member business loan applications, your CRM system can empower lenders to identify cross-sell opportunities on their own.

Leveraging SBA lending

Credit unions that want to expand their business lending opportunities and support local businesses and entrepreneurs might consider getting involved in the Small Business Administration (SBA) loan program.

“A unique aspect of the SBA and NCUA partnership is that SBA small dollar loans do not count against credit unions’ business loan cap, so they are well suited to expanding access to these loans,” said Maria Contreras-Sweet, a previous SBA Administrator, in a press release.  This provides flexibility to credit unions to distribute small dollar loans, increasing access to capital to local economies and enriching the entrepreneurial communities which credit unions serve.”

Loans guaranteed by the U.S. Small Business Administration provide incentives for institutions to lend money to businesses that might not otherwise qualify for term loans. These loans help to bolster local economies by providing capital to small businesses and entrepreneurs. But SBA loans aren’t a magic bullet for business lending. Many financial institutions shy away from SBA loans, due to their reputation of being onerous, complex, and expensive.

To mitigate some of the complexities involved with SBA lending, credit unions can leverage SBA lending technology to help customize and streamline the underwriting and decisioning process for SBA loan application, as well as integrate FRANdata technology, which transfers all franchisor data and eliminates hours of research into franchisees or gambling on the performance of the franchise.

“It is companies that are developing SBA tailored processing software that are beginning to give the smaller lenders a level playing field,” said Jeff Roegge, an SBA lending professional in a recent whitepaper, SBA Lending: An Overlooked Growth Engine. “While the SBA itself will never become a contender in the fintech space, there is a wide landscape of open architecture out there to integrate with the SBA.”

While credit unions do face significant challenges in lending to member businesses, there are many ways that these institutions can bolster current processes and implement new strategies to better serve their communities.

About the Author

Kylee Wooten

Media Relations Manager
Kylee manages and writes articles, creates digital content, and assists in media relations efforts

Full Bio

About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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