In the past year, commercial and industrial (C&I) lending to small- to mid-sized businesses has been on the rise. In a January 2013 survey on bank lending practices, the Federal Reserve wrote that “lending standards on commercial and industrial loans had been eased over the past three months…In addition, moderate net fractions of domestic banks reported that demand for C&I loans from firms had increased over the survey period.”
Additionally, the Thomson-Reuters/PayNet Small Business Lending Index proves that lending to small businesses has increased significantly in the past few years, though still not achieving pre-recession levels. However, as Biz2Credit’s Small Business Lending Index shows, approval rates from credit unions have fallen steadily over the past months, now trailing approval rates by smaller commercial banks.
As Biz2Credit CEO Rohit Arora explains, much of the decreased lending activity and approval rates by credit unions is due to a more competitive small business lending environment, with larger banks benefitting from economies of scale and often offering more competitive rates. “The return of big banks to the small business credit market further threatens credit unions,” says Arora. “Lengthy processes to obtain loans at credit unions are often a large deterrent for customers, which have influenced the movement in higher credit-quality customers electing other lending platforms as their primary option.”
I couldn’t agree more. In a lending landscape with increased competition for high-quality borrowers, low net interest margins and pressure to reduce mortgage lending exposure, credit unions, who generally require borrowers to become members and endure lengthy marathon sessions of filling out seemingly endless paperwork, are not currently poised to win over these high-value small businesses.
C&I loans have become more attractive to all types of financial institutions in recent years because they offer relatively higher margins while reducing concentration risk. Improved economic conditions on Main Street have aligned with slightly loosened lending criteria to make a marked difference in the commercial lending space. It is also noteworthy that C&I loans are more complex to issue and monitor than other types of loans, so credit unions and community banks that are technologically ill equipped will have a particularly difficult time catching up.
Credit unions benefitted greatly from growing antipathy toward big banks and their policies during and following the recession and many saw their membership count swell. Public sentiment is in their favor –but arcane processes are not, particularly when it comes to commercial accounts. Financial technology has made leaps and bounds in recent years, particularly with regard to cloud-based software, with little to no substantial upgrades to data infrastructure required. While software and hardware upgrades at financial institutions have largely focused on back-office improvements, customer-facing technology will provide real gains in both efficiency and customer loyalty, as consumers have come to expect a certain level of online accessibility and ease of use when it comes to core banking services.
Even though credit unions are still capped at 12.25 percent of assets for business lending, speeding up the loan approval process and implementing cloud-based customer-oriented technology could substantially improve the quality and retention of high-value commercial accounts. Despite the customer-oriented attitudes by many credit unions, why would a small business owner with a track record of profitability continue to borrow from an institution whose approval processes and online service capabilities lag far behind a community bank or national bank branch down the street?
According to Biz2Credit, 80 percent of all small business loan applications are rejected by banks due to incomplete or incorrectly submitted paperwork. That’s an astounding number. If credit unions want to build on their reputation as being friendly and accessible financial institutions to keep small business accounts, it’s time for them to explore ways to reduce that number and make the lending process more streamlined.
About James Walter
Finagraph CEO James Walter co-founded the loan automation technology provider to help financial institutions and borrowers reduce costs and increase efficiency by streamlining the highly inefficient lending process. Lenders can sign up for Finagraph, and Finagraph powered BBC Easy, at www.Finagraph.com.