Congress, Stop Squabbling and Let Credit Unions Make More Small Business Loans

A credit union saved Suzanne Hermann’s business, literally. It also saved her $30,000 that she was about to write off as an expensive lesson.

Hermann had built and run a successful chain of three coffee shops and a bagel shop in Augusta, Ga., some fifteen years ago. After she started a family, and relocated to San Antonio, Texas, she decided to do it all over again. With her track record, the thought that she wouldn’t be able to get financing never even occurred to her. She wrote up her business plan, signed a lease, and plowed $30,000 of her family’s funds into the venture.

Then she discovered that banks weren’t the least bit interested in lending her the money she needed to get started. “I must have called on fifteen different financial institutions,” she said. “Most of them didn’t even want to meet with us,” she says.

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She was about to throw in the towel when her husband spotted a billboard for Randolph-Brooks Federal Credit Union and asked his wife if she had talked with them. She hadn’t thought of approaching a credit union, but figured it wouldn’t hurt to try. “We were up against a brick wall, and about to throw in the towel,” she says.

Within two weeks she and her husband had the loan and the Bagel Factory was in business.

Like Hermann, many people don’t think of credit unions first when they think of small business loans. In fact, “the earliest credit unions formed in the early 1900s made small business loans,” says Bill Cheney, President and CEO of the Credit Union National Association. And they have a good track record, with low loss rates on loans that are sometimes made to small business owners like Hermann who couldn’t get the time of day from banks.

But about 60% of the credit unions who make small business loans are reaching the limit on how much they can lend. It’s not because there is a shortage of borrowers who want these loans, or even because they are overextended, but due to a legislative change in 1998 that effectively capped the amount of money credit unions can lend to small businesses at 12.25% of a credit union’s total assets.  The cap may also be stopping other credit unions from starting small business lending programs. Why invest in the technology and training required to make these loans only to be stopped when the program starts to become successful?

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Senator Mark Udall (D-CO) is trying to do something about it. He has introduced S. 509, The Small Business Lending Enhancement Act of 2011 to raise the annual cap to 27.5% of a credit union’s total assets for credit unions who have a track record in small business lending. New entrants would have to prove themselves over five years before they can lend the maximum amount permitted.

It’s not the first time he’s championed this effort. Last Congress, he did the same thing. “In some ways though, I feel like this is Groundhog Day—all over again,” wrote Senator Udall in a blog in The Hill.

If this legislation passes, credit unions can make more loans to small businesses. There’s no cost to taxpayers, no “too big to fail” concerns and credit unions aren’t usually associated with reckless loans. (Since 1997, credit union member business loan net charge-off rates have averaged 0.19%—less than one-fourth of that of banks, says CUNA).

What’s Not to Like? »

Image: Becca!, via Flickr.com

What’s Not to Like?

Plenty say the banks—especially community banks—who raise all kinds of objections that seem to boil down to the fact that they don’t like the competition. Credit unions, of course, say that’s overblown.

“We believe that many of the additional business loans granted by credit unions once the cap is increased would not be loans otherwise made by banks.  They would be loans too small for a bank to consider, or to borrowers unwilling to deal with a bank,” wrote Cheney in a letter to members of Congress.

The biggest hurdle may ultimately be a sharply divided Congress made up of members that often seem more interested in talking about getting the economy going again than actually doing something about it.

Senator Udall’s response to the squabbling?  “I realize that by introducing this amendment I’m getting in the middle of a fight between banks and credit unions as epic as the Hatfields vs. the McCoys.  But this is about helping small businesses—and helping get Americans back to work,” he told Credit.com in a written statement, adding that, “With this bill we can safely and responsibly expand the capital available to small businesses and create over 100,000 jobs in the first year alone—and without spending a dime of taxpayer money. “

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While members of Congress duke this out, Hermann says The Bagel Factory is ahead of projections and “growing like wild.” She’s employed twelve people who were out of work.

And she’s become an advocate for the credit union cause, even travelling to Washington, D.C., to make the case for lifting the cap. “(Credit unions) are out for the people, not for big bonuses for themselves,” she says. “The banks very blatantly said no to me, and the credit union was willing to go out on the limb for me. “

Then she was off to deliver thirty-five dozen bagels.

Have you had trouble getting a small business loan? Learn more lifting the cap on small business lending and weigh in here.

Image: Wikimedia Commons