With the support of the Small Business Administration, credit unions are strengthening their commercial lending
By Robert Bittner
For decades, the majority of credit unions had little experience with commercial lending. That situation is changing, especially when it comes to small-business loans.
In a 2018 letter to the Small Business Administration (SBA), Kaley Schafer, NAFCU’s regulatory affairs counsel, noted that 65 percent of small-business loans under $100,000 were made by credit unions in 2017. “In contrast, only 6 per-cent of bank loan originations were under $100,000,” she wrote. “This illustrates the … commitment of credit unions to provide vital small-business loans to the members of their community.”
Capital For Building Communities
Credit unions are leading the way in supporting small, growing businesses with financial assistance. While one of their most powerful partners in that endeavor — the SBA — is often underutilized those who understand its capabilities and mission know it can be a beneficial addition to the services credit unions offer their members.
“The SBA supports the small-business community,” says Natasha Merz, vice president of commercial lending at Lang-ley Federal Credit Union, headquartered in Newport News, Va. “That’s pretty much what credit unions do. The SBA and credit unions’ missions are aligned.”
The SBA works with credit unions — and other lenders — to provide loans to small businesses. Most SBA-guaranteed loans have rates and fees comparable to those of nonguaranteed loans, and some come with ongoing support for businesses just getting off the ground. Other benefits of SBA-guaranteed loans include lower down payments, flexible overhead requirements and, in some situations, no required collateral.
While a variety of loans are available through the SBA, the primary program for small businesses is known as 7(a) — with its variant, 7(a) Express, also being highly popular. The 7(a) loan provides working capital (and revolving lines of credit) of up to $5 million. The 7(a) Express loan, as its name suggests, offers an accelerated turnaround time for SBA review, along with a maximum loan amount of $350,000.
The CUSO Partnership
For credit unions just beginning to serve small-business members, it may make sense to work with a credit union service organization (CUSO) to help handle SBA and commercial loans, says Natasha Merz, vice president of commercial lending at Langley Federal Credit Union. “Commercial lending is highly specialized lending that requires specific expertise in order to be successful,” she says. “Partnerships alleviate some of the biggest challenges and give you time to explore and understand commercial lending.” A CUSO can, essentially, serve as your out-of-house loan department. “They’ll present the loans to you, train your loan officers, and help you start a commercial-lending department without making a heavy investment,” she says. In addition, Merz points out, they can bring you loans tailored to your risk. “This is especially important because even though a CUSO can be a full-service provider, the credit union still carries the risk.”
For small businesses needing to invest in property or hard assets, the SBA offers the 504/CDC loan, which pairs a lending credit union with a certified development company (CDC) — a third-party nonprofit lender certified and regulated by the SBA. The 504/CDC loan creates a lending partnership, wherein the borrower typically provides 10 percent of the equity, the lender provides 50 percent, and the participating CDC contributes the remaining 40 percent. Given the strength of this partnership, 504/CDC loans can extend up to $20 million.
Randolph-Brooks Federal Credit Union (RBFCU) has been involved in commercial lending since 2005, according to Senior Vice President of Business Solutions Mike Maldonado. “In a typical year, we probably handle more than 150 commercial loans,” he says. “About 10 percent of those are SBA loans.”
The support of SBA capital makes loans possible for borrowers who otherwise would not qualify for a traditional loan. That is an important benefit, Maldonado says. But, he stresses, that doesn’t mean he expects the SBA to mitigate a bad loan risk. “We look to the SBA program to mitigate a borrower’s inexperience or their collateral weaknesses — any short-falls with the credit package.”
William Manger, associate administrator of the Office of Capital Access for the SBA, says the 7(a) and 504/CDC lending programs are very important to the work of the SBA and provide more than $30 billion a year in capital to small businesses. “Many small businesses don’t have access to loans in general,” he says. “Without the lenders making loans using our guarantee, many small-business loans likely wouldn’t happen.”
SBA Success
Maldonado has seen the value of the SBA loan programs firsthand in many success stories of RBFCU members utilizing the SBA program. He recalls one small-business owner of a health and wellness center who, after 10 years in business, wanted to expand but was having difficulty getting conventional financing.
That small-business owner came to RBFCU armed with six years’ worth of financial information and a detailed business plan. He was clearly capable, with a history of success in the community. “The RBFCU team went to work for him to help obtain an SBA 7(a) loan for new construction,” Maldonado says. “He recently held a grand opening for
his expanded facility thanks to the SBA program and our staff.”
Another success story is one that Maldonado says speaks to the culture of San Antonio, where RBFCU is based. The owner of a family-run restaurant came to the credit union after more than a decade of service with traditional loans. After leasing for years, the family was ready for the next step: to start construction on their own building. “They had an established clientele — and great Mexican food — so we knew we could help them continue to serve the community,” he says. “They, too, were approved for a new construction loan, through the SBA 7(a) Express program, and recently broke ground on their own restaurant building.”
Keith Cleary, senior vice president and director of business banking for ESL Federal Credit Union in Rochester, N.Y., says SBA loans enhance ESL’s ability to serve the region. “We have the ability to do business loans without the SBA,” he says. “But we continue to offer SBA loans because we’re committed to the Rochester market, and SBA is a great partner to serve that market. For any credit union exploring business banking, you’d be hard-pressed to be able to execute without a partner like the SBA.”
Navigating the Relationship
With partnerships come challenges as well as benefits. When working with the SBA, Cleary advises, credit unions should be prepared to learn and follow its protocols and procedures. “The SBA has a very prescriptive program, and they refer constantly to the standard operating procedures (SOPs),” he says. “You shouldn’t 
get involved unless you’re committed
to learning, following and fulfilling all of the SOPs.”
The good news is, there are lots of resources available to help. The SBA divides the country into districts, and each is usually supported by a person in the field. “[That person is] a great partner to have if you ever have a question,” Cleary says. “That’s a relationship that should be developed early.”
Making thoughtful research and personnel choices will set you up for success, Maldonado says. “I would advise any credit union considering a commercial department to do their homework,” he says. “You should know your community. Hire the right personnel. Make sure support staff have experience in commercial lending. Make sure you follow best practices and set up internal controls.”
It is also essential to be prepared when working with a CDC on a 504/CDC loan. “In the markets I’ve operated in, there are usually multiple CDCs — at the state, county and city levels,” says Cleary. In such situations, credit unions likely will have options when it comes to choosing a CDC for a particular loan. However, that is not always the case. “I know there may be fewer options available for some people, depending on the economic development approach of the local municipalities. But unless there are some specific restrictions in place for a particular community, all lenders should have options when looking for a CDC.”
The Cap Concern
To further the credit union-SBA relation-ship and ensure the ongoing development of programs and policies that will serve the credit union community, Maldonado’s RBFCU has been a vocal advocate for credit unions with the SBA. “Our executive vice president and chief operating officer, Sonya McDonald, testified before Congress on behalf of NAFCU about the need for SBA loans, expanding on other services, and making it easier to obtain capital,” he says. “NAFCU promotes testimony from credit unions and continuously promotes the much-needed credit union movement through the SBA.”
Perhaps one of the biggest SBA thorns in the side of credit unions — one that is regularly monitored and addressed by NAFCU — is the government’s arcane approach to limiting the amount of funds credit unions are allowed to lend to commercial borrowers.
Gail Jansen, vice president of business services and operations for Southern California-based Kinecta Federal Credit Union, testified on NAFCU’s behalf before the House Small Business Committee of the Subcommittee on Economic Growth, Tax, and Capital Access in April. “When Congress passed the Credit Union Member-ship Access Act (CUMAA),” Jansen said, “it put in place restrictions on the ability of credit unions to offer member business loans. … Congress codified the definition of a member business loan and limited each credit union’s member business lending to the lesser of either 1.75 times the actual net worth or 1.75 times the minimum net worth of a well-capitalized credit union [12.25 percent].”
Business loans above $50,000 count toward that cap. However, Jansen points out that this arbitrary threshold was established in 1998 and has never been adjusted for inflation. “What cost $50,000 in 1998 costs $77,500 today,” she testifies. “That is more than a 55 percent rate of inflation change that is completely ignored by current law and greatly hamstrings a credit union’s ability to meet its members’ needs.”
While the government-guaranteed portions of SBA loans do not count toward the member-business-lending cap — typically 75 percent of the value of a 7(a) loan, according to Manger — the nonguaranteed portions do. “This could ultimately lead to a situation where a credit union may be an excellent, or even preferred, SBA lender but have to scale back participation in SBA programs as they approach the arbitrary cap,” Jansen notes. “We urge Congress to support legislation to provide relief from the arbitrary cap on credit union member business lending.”
Such ongoing advocacy is critically important to ensuring credit unions remain active partners with every segment of their membership, including small businesses.
“Small-business borrowers don’t automatically think of credit unions when they’re looking for a loan,” Merz says. “They look at banks. Credit unions have to make it known that they are commercial lenders. And they have to promote the fact that they do SBA loans. Experienced lenders will get out there, connect with the community and spread the word.”
A Second Look at the SBA
If your credit union considered working with the Small Business Administration for small-business lending years ago and decided it wasn’t right for you, the SBA’s William Manger thinks you should give it another look.
“Today’s programs are completely automated and efficient,” says Manger, associate administrator of the SBA’s Office of Capital Access. “We’ve cut approval times in half for loans up to $350,000; they can be approved in a couple of days. Large loans can be approved within seven days. We’ve become much more efficient in the last five years.”
Manger stresses that technology has evolved as well, making it easier for credit unions and other lenders to navigate the loan process. “We’ve introduced SBA One, which steers lenders through the loan process step by step, which can be helpful for lenders who don’t normally do SBA loans. We’ve also introduced Lender Match, which allows a small-business owner to go to our website and put in the details of what they’re looking for in a loan. If you’re an approved SBA lender, the site will send that potential borrower’s information on to you for follow-up. It allows electronic, free-of-charge referrals.”
Manger says the SBA welcomes the opportunity to partner with new credit unions that would like to begin SBA-guaranteed lending. “We’ve done a lot to make it easy for new lenders to come into the program,” he says. “Reach out to your local SBA district office or headquarters. We’re happy to help.”
Robert Bittner is a Michigan-based freelance journalist.
This article was published in the September-October 2019 edition of The NAFCU Journal magazine.
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