Small business lending continues to be a hot topic, and legislators have turned their sights onto credit unions. As a brief introduction, credit unions are not-for-profit financial institutions that serve all the same purposes of banks, including small business loans. As a member business, your small business would essentially become part owner of the credit union.
While banks primarily serve their stockholders, credit unions generate profit and dedicate that money to serving their members. However, member business lending limits have capped credit unions’ loaning ability. These lending limits are currently on debate in Capitol Hill, reports the Credit Union Times, as legislators try to have the limits lifted. At the heart of the issue lies one major question: Do member business lending limits harm small businesses?
To Lend or Not to Lend: Credit Unions’ Member Business Lending Limits
History of Member Business Lending Limits
U.S. credit unions have been administering member business loans for over 20 years, recounts the Credit Union National Association (CUNA). During the first years, credit unions were free to administer loans as they liked. However, in 1998, the passage of the Credit Union Membership Access Act imposed the first limit on member business lending. Credit unions were essentially limited to lending a maximum 12.25 percent of the credit union’s total assets, reports CUNA.
The battle over small business loans
Big banks and credit unions are now fighting over member business lending limits. Credit unions argue that lifting lending limits would help all credit unions and the national economy. Advocates claim that raising limits would inject $13 billion in new credit for small businesses, reports the Maryland and D.C. Credit Union Association. The country would also see 140,000 new jobs soon after the limits are raised.
As would be expected, the American Banker’s Association (ABA) begs to differ on these benefits. The ABA argues that more credit union lending would starve local banks, while benefiting only a small minority of credit unions. Community banks are against raising member business lending, arguing that large credit unions will push out small, independent banks.
It’s true that most credit unions have not approached their lending limit, but the National Credit Union Administration (NCUA) reports that smaller credit unions are deterred from offering more loans precisely because of the limits. After all, why implement an expensive loan system if you can only lend out so much?
Furthermore, one should question the bank’s intentions for lobbying. After all, the legislation should help small businesses access credit at the best rates possible – not protect a bank’s monopoly on lending.
Is credit union lending safe?
According to a report by the U.S. Treasury Dept., member business loans are generally safe—even safer than loans from commercial banks. The report reads, “member business loans are generally less risky than commercial loans made by banks and thrifts because they generally require the personal guarantee of the borrower and the loans generally must be fully collateralized.”
The ABA argues that raising the limits would threaten credit unions’ safety and soundness, placing them at risk, but the Treasury department seems to believe otherwise. Likewise, the NCUA declares that raised limits would help credit unions manage risk better. The NCUA suggests that greater member lending would allow credit unions to better diversify their lending portfolios.
How small businesses benefit from raising limits
Greater access to capital generally helps small businesses, and credit unions can provide another avenue for loans. Small businesses have mixed reports about their access to credit, says Biztrends. Gallup survey results suggest businesses receive a good amount of lending. On the other hand, a survey from the National Federation of Independent Businesses claims that fewer small businesses had their borrowing needs met. The mixed signals suggest that small businesses are still in a tough spot when trying to access capital.
Ultimately, small businesses need more options for finding loans. Raising member lending limits might mean greater access to more funds for a wide range of small businesses.