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Matthew and Kelly Lembke know the frustration of getting turned down for a business loan at a commercial bank. In 2004, they applied for a $40,000 loan to buy a truck brokerage company in downtstate Normal. But the bank said “no,” and they went to plan B, Peoria-based Citizens Equity First Credit Union. The credit union approved their loan and Lembke Inc. was born.
“As our business grew, our line of credit also needed to grow in order to keep up,” Kelly said. And since turning to the credit union, they have received several increases to their credit line, “from $30,000 in 2004 to a current limit of $625,000.”
The Lembkes, it turns out, were ahead of their time.
Post-recession, with banks holding back on small business lending, credit unions have picked up some of the slack. They are poised to lend even more aggressively if Congress lifts an existing cap on loans, as expected.
“We see banks pulling back, but in contrast, credit union portfolios are growing fairly strongly,” said Mike Schenk, vice president of economics and statistics with the Credit Union National Association.
Credit union loans in the U.S. climbed 6 percent to $38.54 billion as of December 2010, the most recent data available, compared with the year earlier. In Illinois, loans by credit unions also rose by 6 percent over the same period to $895.9 million.
At the same time, the total amount of commercial bank business loans outstanding has been on a steady decline throughout the Great Recession, falling 6 percent to $652.29 billion in 2010 from $695.25 billion in 2009.
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The latest data from the Small Business Administration show that banks in Illinois are mirroring that national trend, though to a lesser degree, with a 3 percent decline in business loans outstanding to $18.80 billion in 2010. Although credit union business lending is a small piece of the pie – just 5 percent – it’s poised to get bigger if Congress acts to raise the current lending cap on credit unions of 12.25 percent of assets. Many credit unions are close to bumping up against that cap.
A bill introduced in March, the Small Business Lending Enhancement Act, would more than double that threshold.
“We believe that if it goes up from 12.25 percent to 27.5 percent of assets, credit unions could land up to $13 billion in additional loans and 140,000 jobs throughout the nation in the first year after the cap is raised,” Schenk said.
Schenk says the quality of credit union loan portfolios puts them in a better position to lend, another argument in favor of lifting the cap. This, he said, was reflected in credit unions’ 2010 net charge-offs that were roughly one-third the bank average.
Still, making more capital available isn’t a guarantee that lending will take place.
The Small Business Jobs and Credit Act enacted last fall was supposed to encourage commercial banks to use a $30 billion pool set aside specifically for lending to businesses.
But with a disappointing response from banks so far, the Treasury Department extended the deadline for the program to May 16 from the original deadline of the end of March.
“There is definitely a little bit of caution,” said Brian McDowell, chief investment officer for the Oregon-based financial firm Cascadia Wealth Management. “The heart of the matter, in my opinion, lies around uncertainty and new risks.”
Without a clearly laid-out regulatory framework, “most bankers do not want to take the risk of employing capital or making loans with the uncertainty of not knowing what the rules are,” McDowell added.
“Our bank and loan portfolio has shrunk some in the last year as part of our strategic plan,” said James G. Gorst, chief operating officer of Foster Bank based in Rolling Meadows. Foster Bank’s small business portfolio dwindled by 8 percent to $195 million from 2009 to 2010.
Experts in the financial services say such restraint is understandable.
Greater scrutiny from government regulators, a drop in credit lines and dramatically reduced home values have made lending “a risky business for bank officers,” said Dave Bagley, managing director at the financial consulting firm MorrisAnderson and member of the Turnaround Management Association Chicago/Midwest Chapter.
“There is a lot of hesitancy on the part of banks toward these smaller companies,” he said, pointing to the burden that falls on the bankers who put their names on new loans.
This kind of caution in the banks’ decision-making process has left small business owners with more restrictive requirements that are hard to meet, such as credit scores of no less than 740 for SBA-backed loans. In addition, more small businesses are reluctant to take on more debt given the weak economic recovery.
“Small businesses equate borrowing with debt and debt with burden,” said John Krubski, research advisor at the Guardian Life Small Business Research Institute.
McDowell of Cascadia agreed that “if [owners] can get by without loans, they are doing so,” to avoid the risks and vulnerabilities that come with loans.
But at some point, confidence will return, according to Bagley of MorrisAnderson, and banks will start lending more broadly again. Already, he said, there are hopeful signs, such as mounting competition among banks to lend to the most credit-worthy, financially healthy businesses.
As banks bide their time, however, credit unions are making loans, and inroads, with small business customers.
Article from lovemycreditunion.org
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