Why Some Small Business Borrowers Bypass Credit Unions

Do credit unions still meet the needs of small businesses? Listening to some fintechs, they don’t.

“Unlike a bank, our application process is quick, easy and transparent,” peer-to-peer lending marketplace Funding Circle said on its website. Comparing its technology- and data-driven approval process to the “clunky and inflexible” underwriting process at traditional banks and credit unions, Funding Circle pitches that it provides funding in as few as five days from acceptance of an offer.

“More and more small businesses recognize that banks can’t meet their needs and now turn to alternative borrowing options,” Funding Circle U.S. Managing Director Bernardo Martinez said in a recent interview for Forbes.com. Citing a company survey, Martinez said the top reason small- to medium-sized businesses came to Funding Circle before going to a credit union or traditional bank for a loan was their concern the decision would take too long or would be too much of a hassle.

Of course, other surveys showed that borrowers have their own gripes with fintechs. A new report on the latest Small Business Credit Survey by the Federal Reserve banks found that satisfaction among successful credit applicants was consistently lowest among online lenders (49%). It was highest at credit unions (85%), followed by small banks (79%) and large banks (6%). Overall, more than 60% of applicants to online lenders reported challenges with their applications, compared with only about half of all large bank and small bank applicants, according to the 2018 Small Business Credit Survey.

High interest rates and unfavorable repayment terms were the most commonly cited challenges with online lenders; online lenders were cited more than twice as often for those challenges than either large or small banks or credit unions were cited.

However, the Fed survey continued to find higher levels of dissatisfaction with the wait times on credit decisions and funding at credit unions than at online lenders. Similarly, a difficult application process was a more common complaint among applicants at credit unions than among applicants to online lenders.

Loan officers, credit analysts and others who have been in the business for a while are probably not surprised that prospective members get frustrated with waiting for decisions on business loan applications. Bankers get frustrated, too.

Neill LeCorgne, vice president of banking at Abrigo and the former president and director of a multi-bank holding company in Florida, recalled that the loan approval process at his former institution had gone unchanged over several decades. It was slow and treated nearly every credit the same whether it was complex or straightforward, or whether it was extremely strong or clearly weak. That is the case with many institutions today as well, LeCorgne said during a recent Abrigo webinar.

“What that means is our process is still inefficient. I think we miss opportunities to grow our franchise with good loans, and more importantly, I think in cases where we tend to take a long time to get back to members, the member experience needs to be improved pretty dramatically,” he said. Otherwise, traditional lenders risk losing members to faster lenders with better member experiences.

Using Technology to Win Back Business

Technology can play a critical role in retaining business members who are looking to borrow. LeCorgne noted that technology can speed up nearly every piece of the loan origination process from credit spreading and underwriting to the loan decisioning process. Credit unions providing SBA 7(a) loans – considered some of the most paperwork-intensive loans offered – can utilize SBA loan origination and underwriting software that generates required SBA forms 1919 and 1920 and integrates with E-Tran to streamlines the process – all within the same platform as the institution’s commercial and personal loans.

“Some of these technologies that were unaffordable to credit unions years ago are now not only affordable, they’re crucial to achieving the necessary scale that will make business loans more advantageous to the member and make the credit union’s business more sustainable,” LeCorgne said.

Small businesses are not the types of prospects that credit unions can afford to cede to fintechs. The Fed’s Small Business Credit Survey found that among employer firms, 72% expect revenue will increase over the next 12 months. In addition, among those that had applied for financing over the previous year, 56% had done so in order to expand the business, pursue a new opportunity or acquire business assets.

Credit unions have a unique advantage over other financial institutions and online lenders: Member satisfaction. Credit unions have seen a notable increase in small business lending and in order to continue momentum in this market and appeal to prospective members, credit unions will need to take a page out of the online lender’s book and invest in technology to maximize small business lending efficiency.

Mary Ellen Biery is Senior Writer & Content Specialist for Abrigo. She can be reached at 984-242-2578 or maryellen.biery@abrigo.com.