How to Boost Member Business Lending

Credit unions’ approval rate for small business loans was 39.8% in October 2019 – up slightly from the previous month’s record low of 39.7%, according to the Biz2Credit Small Business Lending Index. For big banks and community banks, on the other hand, small business lending remains strong.

“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,” Rohit Arora, CEO of Biz2Credit, said in a press release. “Banks and institutional lenders are more aggressive in small business lending.”

Despite the fact that credit unions’ member business lending 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, it also helps back credit unions’ mission to support local businesses and communities.

Going Digital to Remove Barriers to Entry and Capture More Business Lenders

The MBL cap isn’t the only thing restricting credit unions from pursuing business lending. The lack of resources – both from personnel and technology – can hamstring smaller credit unions. The cap, coupled with costly resources, can leave some credit unions reluctant to set up small business loan programs.

“Credit unions should make it a goal in 2020 to either invest in digital loan application capabilities on their own websites or else partner with a fintech firm that can provide the capability to do so,” Arora said. “Although the member business lending cap is a hindrance for some credit unions, the bigger problem is that many credit unions are technologically behind banks and alternative lenders.”

In order to be successful at business lending, it’s important for credit unions to focus on areas they do 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 or 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 Association 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,” SBA Administrator Maria Contreras-Sweet said 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 that 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 applications, 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,” SBA lending professional Jeff Roegge said 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.

Kylee Wooten is media relations manager for Abrigo. She can be reached at 984-242-2629 or kylee.wooten@abrigo.com.