Chapel Hill, NC/August 11, 2010:  Just exactly where can a small business owner turn for funding?

According to a recent survey from the National Small Business Association, the share of business owners who say they cannot get adequate financing rose to 41% mid-year.  Just two years earlier, the percentage of small business owners struggling for funding was comparatively small at 22%.

Small businesses account for 99.7% of all firms, pay 44% of all U.S. payrolls, and provide just over half of all jobs, according to the Small Business Association.  Without financing, job creation is held back.  In a slow economy, this is a frustrating prospect for many employers, the unemployed, and politicians as well.

Could credit unions help jump start the economy?  According to CUNA president and chief executive office, Bill Cheney, job creation is a key reason Congress should raise the commercial lending limits of Credit Unions from 12.5% of assets up to 27.5%.

Raising the limit, says Cheney, would free up $10 billion in small business lending and create 108,000 jobs in the next year.

An amendment authored by Sen. Mark Udall, (Dem., Colo.) to raise the limit is part of a pending small business jobs bill to be considered by the U.S. Senate when it reconvenes on September 13.

NCUA Chairman Debbie Matz also backs the lending increase, saying there is “a tremendous need” for such loans within the small business community.  Matz has also commented that credit unions could spur future job creation with increased lending capacity.

David Ely, professor of finance at San Diego State University, believes that credit unions have the financial capacity to safely increase commercial lending.  He cautions, however, that the impact on the economy would be modest. The banking industry already holds more than $800 billion in small-business loans.

According to a July 29th article in Inc. Magazine, this year the four largest U.S. Banks have refocused on small business lending.  Bank of America appears to have increased small business loans by $9 billion over last twelve months, with Wells Fargo boosting small business lending by 30% in just the last quarter.  Citigroup claims it has doubled small business loans over the last six months, while Chase has hired more than 230 small business lenders.

These four banks combined could easily generate more small business loans than all credit unions combined.  So why are most banks opposed to the Udall amendment?

Rose Osweld Poels, senior vice president and counsel of the Wisconsin Bankers Association, has stated that, “Raising the current cap on credit unions’ business lending is an action which would benefit only half of one percent of all credit unions in the nation.  This issue is being promoted by the largest, profit-driven credit unions, those who have strayed the furthest from their mandated mission of serving those of low and modest means for which they enjoy a tax exemption that potentially costs Wisconsin taxpayers $40 million a year….Allowing aggressive, profit-driven credit unions an increased lending cap would take business loans away from taxpaying entities in a time when Wisconsin needs every tax dollar it can get.”

Brett Thompson, President & CEO of The Wisconsin Credit Union League, disagrees. “Banks have admitted they are unlikely to increase their business lending because of regulatory pressure that has forced them to restrict their lending.  So, knowing full well they’re not going to step up to help, it's ill-conceived that Congress would allow banks to block a credit union provision that could preserve jobs and get Wisconsin firms moving again.”

CUNA, also headquartered in Wisconsin, has taken the lead in advocating for higher lending limits.  Bill Cheney has responded to bank lobbyists by stating, “There is no public policy reason not to permit credit unions to do more lending to their members who own or want to start small-businesses. In fact, credit unions have proven for years they are capable of making these types of loans safely and soundly. During this ‘Great Recession,’ while bank business lending contracted, credit union business lending expanded. Never mind that improved business lending potential for credit unions would create more than 100,000 new jobs, and inject $10 billion into the economy, both at no cost to taxpayers. The bankers are doing whatever they can to hold back this legislation."

Credit unions, not banks, may be the real stumbling block to providing additional funding aid to small business owners. According to figures supplied by CUNA, just an estimated 23% of all credit union offer some form of commercial financing.  Among the larger credit unions, however, those with more than $500 million in assets, almost 300 institutions were making small business loans. 

A notable exception to offering commercial services among the credit unions is the nation’s second largest, State Employees Credit Union (SECU—$16 billion in assets).  Philip Greer, Senior Vice President of Loan Administration for SECU, feels that small business lending and credit unions don’t mix.  “We have always taken the simplistic approach that if we can’t offer a particular service better, faster and cheaper than our competitors, we should find something else to do,” he said.  Greer added, “Honestly, the commercial banks do a pretty good job in business lending, most particularly the smaller community banks.”  SECU will not offer either the deposit or loan business services with the exception of mortgage loans made on one to four family rental properties.

SECU’s asset size is less than half of the largest U.S. credit union, Navy Federal.  Although Navy Federal offers commercial services on par with many community banks, the membership is limited.  Because small businesses cannot go to Navy Federal directly for commercial services, and even the second largest credit union is not involved with small businesses, can credit unions collectively and realistically have any real impact on job creation? 

Certainly, not on a national basis at least.

Credit unions, however, were not chartered to have a national impact.  Rather, membership was limited intentionally to benefit individuals with limited access to banking services and, by extension, to serve the local community.  As such, how a credit union can best serve its membership is a decision best left to the institution.  

How much value a credit union could realistically contribute in a community is likely dependent upon the size of the community, or on the concentration of local credit unions.  In Los Angeles County, for instance, the increase in lending capacity proposed by the Udall amendment could generate $694 million of additional small business loans over the next year resulting in about 7,500 new jobs, according to the California Credit Union League’s Business Journal.  

While SECU serves an extensive membership base in North Carolina, and probably would have a positive impact on job creation, few other individual credit unions could be so influential in their local market area.  

Perhaps credit unions may not influence local job creation to the same extent as a bank, the value and impact of any small business loan could be invaluable to a given employer and their employees’ families.   Could that little manufacturing concern, with a little help at the right time from the credit union, become a Fortune 500 company in time? 

Some banking industry groups have vigorously opposed the Udall amendment, however, arguing that higher lending limits for credit unions amounts to an unfair competitive advantage.   Unlike banks, credit unions are tax exempt and would theoretically hold a pricing advantage over the for-profit competition.

If allowing credit unions the opportunity to lend would have little national impact, but could be valuable to local communities, banking opposition would seem ill-timed during this difficult economic period.  Faced with complaints regarding the difficulty of obtaining small business financing, and near double-digit unemployment in most communities, banks would probably benefit greatly from the economic stimulus of more than 100,000 jobs that the Udall amendment could provide.