The growth opportunity hiding in plain sight

Small businesses are an essential part of the American economy. Over 33 million small businesses in the US employ 62 million Americans— representing 46% of private sector jobs. Many of these business owners are already members of credit unions. Considering the current economic uncertainty and liquidity challenges, credit unions must be creative in considering proactive strategies to maintain and grow their commercial loan portfolios profitably while minimizing risk. The government-backed SBA loan program is a time-tested solution and should be considered integral to the product line every credit union offers to its members and community.

In the fiscal year ending September 30, 2022, US lenders closed $26 billion in SBA loans while credit unions closed only $638 million, representing just 3% of loans closed by US lenders. In fact, only 171 credit unions out of nearly 4,800 (3.6% of the industry) closed an SBA loan at all. How can the credit union industry increase this amount and why should cooperatives focus on this growth opportunity?

With the industry’s focus on bolstering the financial well-being of both members and broader communities, small business lending can play a significant role in offering real economic benefits and enhancing financial security locally. When a credit union welcomes a small business as a member, not only will the institution benefit from a new business account, but the credit union can also assist the owner personally along with their circle of family and friends, their employees, their customers, and so on. For community-based financial institutions, word of mouth matters and can have an outsized impact on growth.

So why don’t credit unions make more SBA loans? First, SBA loans are often considered overwhelmingly difficult, time-consuming, and document-intensive to process and close. Additionally, most credit unions do not have the staff and expertise required to understand the intricacies of the rules and regulations inherent to SBA lending. Since the SBA is a government entity, this perception of intrinsic challenges is not without some level of merit. This is primarily since prospective borrowers may have never applied for a commercial loan before, and, therefore, these borrowers often require more personalized attention. However, these loans are actually no more difficult than any other government loan, such as FHA mortgages. The fact is that all government loan programs require all documentation to be completed and submitted before obtaining loan approval.

Another obstacle to credit unions embracing SBA lending is that staffing issues have increasingly become more challenging. SBA lending is a specialized field requiring specific expertise that is not only in short supply but is also not readily replaced by new workers. This is precisely why a Loan Service Provider can be an invaluable asset.

Credit unions that sign up with a Loan Service Provider, such as a CUSO, to assist with SBA loan production will find that outside expertise and support saves them both time and money. The CUSO can manage all aspects of SBA loan processing. Additionally, a Loan Service Provider can assist credit unions in navigating the SBA landscape. These services typically amount to only a small portion of the cost associated with hiring, training, and retaining dedicated SBA staff because a Loan Service Provider or CUSO is only compensated for loans requiring their assistance.

SBA lending can also help credit unions better manage any liquidity issues they may be experiencing. Lenders can sell the guaranteed portion (75%) of the SBA loan through a secondary market investor and not only recoup the capital portion of the loan but also earn a premium—anywhere from 6-10%. Finally, a lender that sells the guaranteed portion of an SBA loan will receive a 1% servicing fee return on the sold portion of the loan for the life of the loan. Credit unions can then reinvest the funds from the sale of the guaranteed portion of the loan and the servicing fee.

Another feature of this program is that the SBA guarantees seventy-five percent (75%) of the face value of each loan. This means that when a credit union makes a $500,000 SBA loan, the total risk on that loan equates to only $125,000. This program also assists with lending cap considerations, as the guaranteed portion of the loans do not count against the credit union’s lending cap.

Due to the nature of SBA loans, the interest rates are higher, variable, and tied to the prime rate. Considering the current economic environment and recent rise in interest rates, these loans provide a favorable return as well as a hedge against interest rate compression. The typical lifespan of SBA loans is approximately four and a half years, after which the borrower, who is now more established and bankable, will either pay off or refinance the loan.

A robust SBA loan program can benefit credit unions for several reasons, not the least of which is that it puts the credit union right in the middle of financially strengthening the community. It adds flexibility to a credit union’s lending portfolio, allows for loan diversification, provides strong income, and limits the credit union’s risk exposure.

Learn more about the SBA lending opportunity by contacting info@mbfs.org.