From the May 2004 National Association of Credit Union Service Organizations’ Annual Conference in Las Vegas.

By Bill Merrick

CUs Fill A Void For Small Businesses

Would you lend $150,000 to a guy who sells pants over the Internet? Member Business Lending LLC did, and it didn’t lose its shirt. Member Business Lending is a credit union service organization (CUSO) co-owned by Mountain America Federal Credit Union, Salt Lake City, and America First Federal Credit Union, Ogden, Utah.

Not only was making the loan a smart business decision—the member’s business had more than $1 million in sales the first year of operation—it helped a loyal member who couldn’t get financing elsewhere. Now the CUSO is poised to provide further funding in stages to help the business grow further, says Don Clark, executive vice president, financial services, and president of Mountain America Financial Services LLC, a wholly owned subsidiary of the credit union.

This is the type of loan that most banks won’t make because it’s not big enough, Clark says. It’s the right size for the CUSO, though, which was able to approve the loan because the organization addressed the three keys to small-business lending success:

1. Hire the expertise. Mountain America Federal hired Kent Moon, a former bank senior vice president with 30 years of experience in Small Business Administration (SBA) lending, as vice president of Mountain America Financial Services. Moon hired business lending personnel who were experienced in underwriting, processing, closing, and servicing SBA loans. There’s a business loan expert at each of the credit union’s branches.

"We had to go through a big culture shift at the credit union," Clark notes. That’s because business loan officers are compensated differently than consumer lenders. And it takes longer to process business loans than consumer loans.

2. Form a "super CUSO." Instead of individual credit unions creating their own CUSOs, Clark advises forming a "manufacturing facility of loans," or a "super CUSO" that many credit unions use. This lowers the cost of making each loan, boosts revenue from sales to the secondary market (larger pools equal better pricing), and leverages SBA expertise, which is a primary barrier to entry.

3. Partner with SBA. "Large banks aren’t using the SBA program well," Moon notes. "They’re lending to established companies. New businesses need money, too. SBA is trying to get banks to make smaller loans but they won’t do it. That’s why credit unions came in. There’s a big demand for these loans in your credit union."

"We do the loans other [financial institutions] don’t want to make," Clark adds. Mountain America Federal’s average SBA 7(a) program loan is $47,000. "These loans really help small-business people. They’re the reason SBA was created. Credit unions should identify small-business members who have a need for long-term capital. They’ll be surprised how many do. Most small-business owners use credit cards because they get turned down for business loans."

The return on assets for SBA-backed loans is about 5%, Moon adds. Member Business Lending has funded 204 small-business loans for $12 million and has approved but not yet funded 43 more.

Plus, business borrowers’ checking account balances are twice as big, on average, as nonbusiness borrowers—more than $15,000. In the future, Member Business Lending will offer commercial insurance, group insurance offerings, and 401(k) plan design and administration.