By Mitch Jacobs – December 15, 2011
Does this story sound at all familiar to you?
A local Main Street business, an auto repair shop, restaurant, or local retailer contacts the credit union and expresses an interest in financing for marketing, renovation or remodeling, to purchase new equipment or to better handle some challenge confronting their business. Whether you know the business owner well or not at all, you face the same challenge. You’d like to serve them, that’s what your credit union is “here to do” and it is what the country needs right now. Further, you have the deposits of this business, and you don’t want to lose those. Furthermore, a successfully paid-off loan is a big part of how your credit union generates revenue. So making a loan will positively impact your capital base by generating interest.
However, your desire to act and your credit union’s ability to act are two very different things. The business owner is seeking less than $100,000. (The national average for Main Street loans is $30,000.) They only have a couple of the dozen or so documents you require to commercially underwrite them. And, even if they did provide all the documents required, you could never make money on this loan. The business owner, having gone through all the challenges associated with building a Main Street business, including cash-flow jams that lead to late payments, and using every penny of available personal credit to pursue their dream, has a very low credit score, which is below your policy requirement. At best you might be able to get them a business credit card with an available line of a few hundred dollars. You and the business owner (who will present every credit union and bank, large or small, with the same conundrum) are stuck.
If you are in a credit union that serves Main Street, you are sure to have experienced this predicament. What can we do about this age-old problem in making small loans? How do make small business lending more cost-effective, without sacrificing efficiency?
Read the full article here.