New bill could help credit unions lend to small businesses

Big banks are becoming notoriously difficult for small business owners or entrepreneurs to get financing through. Credit unions are building a strong portfolio of business loans, but a new act in Congress aims to make lending more available.

Business loans from credit unions

In an effort to expand offerings and meet customer needs, many credit unions are partnering with the Small Business Administration to offer SBA-backed loans. In 2010, about 30 percent of credit unions offered small business loans to their members. This is an increase of more than 4 percent in a year, the same time period in which bank lending decreased by almost 2 percent.

Pay day loans lending holds steady.

A higher approval percentage

The biggest differences between credit unions and banks, when it comes to offering small business loans, is how often the loans are approved. Big banks tend to approve between 9 and 20 percent of applications for small business loans. Credit unions, on the other hand, tend to approve more than 50 percent of small business loan applications.

Changes proposed to lending criteria

The Small Business Lending Enhancement Act, which has currently been proposed in both the House and Senate, would make small business lending for credit unions significantly easier. The Act would allow credit unions that meet certain criteria to lend up to 27.5 percent of their assets to businesses, rather than the current cap of 12.5 percent. These changes would mostly affect businesses looking to borrow less than $1 million, which are the hardest to get from big banks and the majority of small business loans in the United States.

Paying for the privilege

Though credit unions tend to approve small business loans more readily, the loans usually come with a higher interest rate. Credit unions are not-for-profit, member-owned institutions. Because of this, these credit unions often make small business loans more expensive to help mitigate the risk of taking on the loan from a business that may not be proven. For small business owners, this may mean paying a bit more, but it also means borrowing from a not-for-profit institution.

Sources

Fortune Magazine
MSNBC
MarketWatch