Small Business Lending Offers Potential Growth Avenue for Credit Unions
Boomers and Gen Xers, who are likely to be existing CU members, own about 85% of U.S. small businesses.
With the current banking landscape being fiercely competitive, credit unions must find ways to attract new members and fortify their deposit base with a steady flow of funding. For credit unions, small business lending is attractive as a potential avenue for growth.
The United States is currently home to over 33 million small businesses, according tto the U.S. Chamber of Commerce, which account for nearly 99.9% of all businesses in this country. Of these, boomers and Gen Xers own around 85% of them. Not coincidentally, these two groups comprise a large portion of credit union membership bases, suggesting a considerable overlap between credit union members and small business proprietors.
In the U.S., small businesses can range from side hustles that generate secondary streams of income, to small mom-and-pop shops and well-established community cornerstones like restaurants, spas and auto shops. Often these business owners maintain their business checking at a different institution than their personal banking relationships. While many small-business-owning credit union members would like to consolidate their business and personal banking relationships, they may have difficulty finding the banking features they need at their credit union. Chief among these is checking with remote deposit capture and the ability to secure a business loan.
Small Business Lending Aligns With the Credit Union Ethos
Small businesses employ nearly 61 million Americans, according to the U.S. Small Business Administration Office of Advocacy, forming the financial backbone of most communities where credit unions operate. Failing to capitalize on small business members can be detrimental for credit unions as community banks, large banks or specialized fintechs work to lure away members, jeopardize long-standing relationships and threaten the stability of deposits.
Compared to other deposit types, small business checking accounts tend to be “stickier.” These accounts bring higher average balances and more opportunities for fee revenue, generating transactions and exhibiting greater stability over time. Prioritizing small business lending enables credit unions to simultaneously enhance deposits, deepen member relationships and increase retention. This strategic focus not only empowers local business owners, but also allows credit unions to significantly impact the communities they aim to serve.
Credit unions traditionally rely on individual member deposits, which can be volatile. Generating deposits from small businesses offers several benefits for the credit union, including improved financial stability and a more reliable source of funds to fuel other lending channels compared to individual accounts.
Factors for CUs to Consider Before Executing an SMB Lending Strategy
Assessing SMB loan applications requires additional data points and verifications. This includes things like KYC/KYB, cash flow analysis and debt-to-income ratio assessments for businesses to ensure responsible risk management in small business financing. This needs to be done swiftly, as small businesses often require capital quickly to take advantage of market opportunities.
Some banks and fintechs have recognized the significance of quick decision-making and access to funds, embracing innovative technology to automate much of the SMB lending process. In response, credit unions can implement similar strategies to maintain a competitive edge, either by partnering with a Lending-as-a-Service (LaaS) fintech or integrating a business lending solution directly into their existing tech stack.
In today’s market, capitalizing on small business lending opportunities within their existing membership base should be a top priority for credit unions, as it provides a viable strategy to protect and grow deposits while generating meaningful positive impact for members and their communities.
Will Tumulty serves as CEO of Rapid Finance, a Bethesda, Md.-based fintech and provider of working capital to small businesses in the U.S.