Guest editorial by Loughlin Cleary, President, Lenders Cooperative
As credit unions strategically try to expand their small and medium sized business (SMB) lending footprint in their local communities, they are finding that in addition to traditional competitors like community banks, non-bank lenders, in particular, have gained tremendous market share since the financial crisis of 2007-2008. One of the key drivers for this massive growth is that many of these lenders are using better technology, which has reduced friction and provided quicker access to funding for business owners.
Historically SMB lending has not been a major focus for most credit unions. Because of this, many lack true subject matter expertise in this area, especially as it pertains to Small Business Administration (SBA) lending products. Furthermore, a credit union’s lending department staff are often tasked with managing both the consumer side as well as business and commercial lending.
Another key challenge for SMB lending is the traditional credit scoring system. Leveraging FICO scores as a lending determinant is limiting credit unions in their ability to accurately manage risk and effectively decision small business loans. While the FICO score can be useful at reflecting data like bill payment history, with SMB lending, credit unions also need additional financial and macroeconomic data to properly mitigate risk while efficiently funding those loans.
Non-bank lenders charge small business owners exorbitantly high interest rates on SMB loans in exchange for fast access to capital. Small business owners would prefer to work with local financial institutions, and if their local credit union could provide a similar frictionless experience and fast access to capital, they would likely be interested. There is a tremendous opportunity for those credit unions to improve their customer experience using technology and subject matter expertise to retake that SMB lending market share.
With arguably 99% of U.S. companies technically classified as small businesses, the opportunity for credit unions is immense. Last year alone, $15 billion of loans were processed by non-traditional lenders. Credit unions have the perfect opportunity to position themselves as a better alternative for local small business owners by charging lower rates than their non-bank lending competitors, while providing a better, hands-on customer experience.
With the right loan origination technology and back-office operations for SME support, credit unions can compete in today’s dynamic, rapidly evolving market, with the opportunity to revolutionize and strengthen the relationships with their members (and possibly increase deposits by gaining the operating accounts behind those businesses, as well).
Today there are services available to help credit union staff, including credit underwriting support, marketing, SBA lending operations support and white-labeled, specialized call centers focused on assisting members with their questions and needs. Additionally, there are new business credit scoring expected loss models that are becoming more widely available that can drive efficiencies and mitigate risks for credit unions by offering better insights on their valuable business members not only at origination but also for ongoing portfolio monitoring.
Credit unions, by purpose, exist to serve their local communities, and yet many fail to adequately support a vital component of these communities – small business owners. The last few years have been particularly challenging for these owners as they have worked to navigate the effects of the pandemic, supply chain issues and worker shortages, and now, potential recessionary pressures. These businesses are the key to our vibrant, thriving communities, but they need the right financial support to continue flourishing. Credit unions are perhaps best positioned to fulfill this need and grow alongside these vital members in the process.
Loughlin Cleary is President of Lenders Cooperative, a client-owned cooperative representing a community of over 140 and growing forward-thinking banking institutions leveraging best-in-class loan origination software coupled with shared services, including credit underwriting, SBA LSP support, bank operations and white labeled call center support.