Small businesses deserve the credit union model
It’s a given that the credit union business model has served retail consumers well: few fees, lower loan rates, and higher savings rates tell the story. But, what about small businesses in your geographic market? Recent research shows that the $300 billion small business loan market has an unmet need of $80 billion to $120 billion because traditional lenders are ignoring this sector. Further, the administrative costs associated with a $100,000 loan are, approximately, the same as a $1,000,000 loan, but with less profit, which has led traditional lenders to larger loan opportunities. The opportunity for credit unions is that about 70% of small businesses want loans below $500,000.
Credit unions have material advantages in serving the small business lending market, which should not be undervalued. Credit unions’ cost of funds is usually less than that of banks, and much less than banks’ external costs of capital. And, where online lenders present a threat; their capital costs can be higher than ten percent, often obtained from institutional investors and venture capital. Further, digital business models can substantially reduce the cost of lending during every stage of the process, making small business members even more profitable for credit unions.
Credit unions have more substantial pluses in that small business owners are wanting a local source and atmosphere to financing, as well as the same kind of experiences that have been developed for retail consumers. Small business owners and executives are beginning to desire banking services that have appealing mobile user experiences, much like the technologies they use in their personal lives. In recent surveys, more than half of small businesses indicated a desire for improved digital banking tools and experiences that can be managed digitally from start to finish.
Credit unions can use their locally-owned, low-cost, and high-service strengths to build real competitive advantages in business lending. Current member-friendly loan application processes can be effortlessly applied to the small business market. Why visit the branch when small business borrowers can complete online and mobile applications from their device at any hour, minding their enterprises on their time and terms? Approval times can be condensed to hours or minutes, rather than weeks or days, powered by data-driven structures that swiftly pre-qualify borrowers based on a handful of data points such as personal credit scores, deposit account information, and tax returns.
More important, the business model and culture of credit unions – serving and advancing underserved markets – is a legitimate extension into the small business market space and worthy of credit unions’ strategic consideration. In a world where the most successful businesses make purposeful choices about where to play – and win – credit unions can build a clear competitive advantage in serving small businesses. Done right, business lending is a financial win for both parties – credit union and small business – and a philosophical win for the original and time-honored purpose that credit unions exist.
