Small Businesses Deserve the Credit Union Model
June 5, 2018
It’s a given that the credit union business model has served retail consumers well. When compared to banks, credit unions have fewer fees, lower loan rates, and higher savings rates, which all tell the “people helping people” story.
But what about small businesses in your geographic market? Recent research shows that the $300 billion the small-business loan market has an unmet need of $80 billion to $120 billion because traditional lenders typically ignore this sector. Further, the administrative costs associated with a $100,000 loan are approximately the same as a $1,000,000 loan, but with less profit, leading traditional lenders to larger loan opportunities. There’s an important opportunity for credit unions in this scenario because approximately 70 percent of small businesses want loans below $500,000.
Credit unions have material advantages in serving the small business lending market, which should not be undervalued. Credit unions’ cost of funds is usually less than that of banks, and much less than banks’ external costs of capital. And, where online lenders present a threat, their capital costs can be higher than 10 percent, often obtained from institutional investors and venture capital. Further, digital business models can substantially reduce the cost of lending during every stage of the process, making small-business members even more profitable for credit unions.
Credit unions have another substantial advantage in that small business owners prefer a local source for financing, as well as the positive experience enjoyed by individual members. Additionally, small business owners and executives want banking services that provide mobile user experiences, much like the technologies they use in their personal lives. In recent surveys, more than half of small businesses indicated a desire for improved digital banking tools and experiences that can be managed digitally from start to finish.
Credit unions can use locally owned, low-cost, and high-service strengths to build strong competitive advantages in business lending. Current member-friendly loan application processes can be effortlessly applied to the small-business market. Small business borrowers can complete online and mobile applications from their devices at any hour, minding their enterprises on their time and terms. The approval process, powered by data-driven structures that swiftly pre-qualify borrowers based on a handful of data points such as personal credit scores, deposit account information, and tax returns, can be condensed to hours or minutes, rather than weeks or days.
More importantly, the business model and culture of credit unions serves the industry well as it branches into small-business lending, a market worthy of credit unions’ strategic consideration. In a world where the most successful businesses make purposeful choices about where and how to expand, credit unions can build a clear competitive advantage by serving small businesses. Done right, business lending is a financial win for both credit unions and small business, as well as a philosophical win for the original and time-honored purpose for credit unions to exist.
Jeff Rendel, Certified Speaking Professional and President of Rising Above Enterprises, works with credit unions that want entrepreneurial results in leadership, sales, and strategy. Each year, he addresses and facilitates for more than 100 credit unions and their business partners.
Posted in Strategic Link.