Member Business Lending as a Source of Growth (Credit Union Conference Session Presentation Slides)

Addressing Credit Union Challenges
in Small Business Lending

NAFCU 2012 Strategic Growth Conference
Rohit Arora, CEO Biz2Credit
3/14/2012

© 2010, Biz2Credit, LLC. All Rights Reserved - Proprietary and Confidential

Agenda

• Biz2Credit Overview
• Opportunities for Credit Unions in the SMB lending market
• Challenges for Credit Unions in the SMB lending market
• Case Studies: How Credit Unions can help small business
owners
• Next Steps


Biz2Credit: Who we are
Biz2Credit is a secure online community that connects small business owners
seeking loans with financial institutions willing to lend. Proprietary
technology matches borrower requirements with optimum funding options,
and business services, while managing the exchange of information and
documents.
• Funded over $500 million to date
• Over 1,100 lenders on our platform
• Have direct reach to our network of over 1.6
million small and medium sized business (SMB)
owners
• Community driven content, expert advice as
well as regular updates on small business news
• Rated by Entrepreneur.com as the top small
business financing resource in 2012


Credit Union SMB loans continue to increase
relative to Big Bank SMB loans
Change in SMB lending Change in SMB loan approval percentage
June 2010 – June 2011(1) January 2011 – January 2012(2)

+8.7%

‐1.1%

*

Source: 1. “The Increasing Importance of Credit Unions in Small Business Lending”, James A. Wilcox, Sep 2011
2. Small Business Lending Index, Biz2Credit, Jan 2012


High bank rejection rates represent an opportunity
for Credit Unions to enter/expand their SMB share
Our state‐by‐state analysis of rejection rates for well‐qualified existing
customers* shows the scale of the opportunity…
NEW YORK ARIZONA CALIFORNIA
% % %
40 40 40

30 30 30
Rejection rate

20 20 20

10 10 10

0 0 0

Note: * Big bank lending approvals to existing customers in business for more than 2 years, with $150k+ in revenues and a
personal credit score of 680 or more

Credit Unions have begun taking advantage of
small business lending opportunities
Outstanding MBLs reached record levels in 2011, indicating…
$ Billions % change
14 30.0%

12 +23.3%
20.0%
10 +15.1%
+8.7% +10.5% 10.0%
8
0.0%
6
‐17.4%
‐10.0%
4

2 ‐20.0%
9.2 11.3 9.3 10.7 11.9
0 ‐30.0%
2007 2008 2009 2010 2011
N = 7,091 Outstanding member business loans 12 month growth
Source: Callahan & Associates FirstLook, data as of 12/31/2011


A changing regulatory environment will also affect
the current environment for SMB loans
• Applies to banks with $50Bn+ in assets
Basel III • Raises the capital requirements for these institutions
Regulations • This increases the cost of making loans for big banks,
particularly SMB loans (a high risk classification)

• All financial institutions must comply with over 400 new
Dodd‐Frank regulations listed in the 2,300 page act
Regulation • There may be additional compliance burdens for both
banks and Credit Unions

• Current law caps business lending at 12.5% of a credit
Credit Union union’s assets
Lending • A federal bill to raise the cap to 27% is currently going
Limits through congress
• News on the bill may come as soon as the end of 2012

Our lending index is driving increased awareness
of SMB opportunities for Credit Unions
Our monthly updates are reported by gov’t agencies, and in trade press…


CU Challenges: Unfavorable Credit Markets
• Lending criteria have been tightened at many financial institutions since the
crisis, as lending has become riskier
• Slow big bank response to the changing credit environment has left many small
business owners unable to secure loans
• Low rates limit the attractiveness of taking additional lending risk

“… In 2011, the number of small employers obtaining credit from financial institutions was
approximately the same as the two years prior. However, demand for credit increased
in 2011, meaning more small employers were shut out of the credit market than in
prior years. ...”
National Federation of Independent Business (NFIB)

Credit Union lending to their communities can provide a lower‐risk solution for
local SMB owners , and reduce the pressure on banks to increase lending


CU Challenges: High Member Acquisition Costs
• Many Credit Unions lack the marketing budget to effectively reach target SMBs
• Credit Unions currently have no access to geographically granular data to
reach local SMBs seeking loans
• Likewise, SMBs seeking loans struggle to find lending institutions beyond their
existing bank
• Credit Unions currently lack the branch network and expertise to manage this
challenge
“… These are large costs in relation to the net interest margin and fees yielded by these
accounts, which means increasing efficiency of acquisition has a big impact on bottom
line performance and the rate of capital growth ...”
Flowtracker Bank Analytics

Targeting SMBs with specific attributes (e.g., credit scores, time‐in‐business,
local geography, etc.) can reduce SMB customer acquisition costs


CU Challenges: Financial Knowledge Gap
• A lack of financial understanding can inhibit entrepreneurs’ access to capital by
making options seem limited and the lending market opaque
• Small business owners have little visibility into how they can improve credit
scores or address issues to ensure applications are not rejected
• Current loan providers lack sensitivity to local SMB demands

“... Access to capital continues to be the most difficult challenge for small business owners...
potential entrepreneurs may lack the business savvy to articulate what they need in
business terminology; and such inexperienced business persons may also fail to present a
well‐thought out long‐range alternative plans ...”
Financing Small Business Enterprises, Library of Congress

Credit Unions can leverage their detailed understanding of the local
community to bridge the gap between SMBs and financial lending institutions


CU Challenges: Member retention
• Providing SMB loans can be a good way to strengthen the relationship between
Credit Unions and the communities and customers that they serve
• Customers with existing deposit relationships may be a good entry point to the
lending market for their Credit Unions
• Reducing the complexity and timing of loan applications, as well as annual
verification of accounting and credit data for existing loan customers,
strengthens these relationships further
“… They’re missing out on an opportunity... Small business owners want a relationship.
They want to be able to talk about ideas. They want a partner and credit unions can
offer that ...”
Dorinda Edwards, President/CEO of American Partners FCU
(via Credit Union Times)

Credit Unions should utilize their knowledge of their community to provide
targeted SMB loans & take advantage of technology for ongoing loan mgmt


CU Challenges: Ongoing risk management
• The threat of loan default or the withholding of interest payments can become
a significant barrier to SMB lending by Credit Unions
• Many small business owners do not contact their financial institutions about
the threat of default until their financial situation has deteriorated significantly
• Closer relationships and information sharing with customers can allow Credit
Unions to monitor outstanding loans, providing an “early warning” and
reducing risk
“… A potentially powerful addition to annual financial data on SMEs is...evidence of
company default on credit agreements and/or trade credit payments or whether the
firm is late to file its financial statements ...”
“The Value of Qualitative Information in SME Risk Management”
Altman, Sabato & Wilson

Credit Unions can continually monitor the accounts and filing information for
their SMB loan customers, allowing increased default risk to be identified early


CU Challenges: Resource constraints
• Significant resources are required for document collection and processing in
assessing loan applications
• High cost of document processing and storage for a large number of
applications can limit Credit Unions’ ability to process loans and renewals
• Current document collection systems represent a bottleneck in the loan review
process as sources (e.g, IRS) can take weeks to provide pertinent data

“… Document processing represents a major opportunity to reduce costs. ... many financial
services institutions work with hard copy documents and spend millions on courier
services to overnight documents during account initiation. ...”
Xerox Consulting

Credit Unions can take advantage of existing technologies to optimize the loan
application review process and reduce processing times


Success Story:
The opportunity for a Credit Union to step in when a bank says no…

• Future Green Studio is a design‐build firm in Brooklyn, New
York specializing in landscape urbanism and green roof
design
• The founder was denied a commercial loan from TD Bank
in both 2009 and 2010
‐ Information on other small business loan options was limited
‐ Information about local lenders was limited
• Biz2Credit connected the founder with Brooklyn Cooperative Federal Credit
Union, where he was able to secure an $80,000 business loan

“… Biz2Credit gave us the opportunity to grow as a small business when we were sorely in
need of funding to facilitate our growth ...”
David Seiter, Founder, Future Green Studio


Success Story:
The opportunity for a Credit Union to provide financing for community
businesses…
• A small business owner required financing to fund the
development of four Baskin Robbins franchise locations in
Scottsdale, AZ
• The founder was denied a loan from other lending sources
for six months
• Biz2Credit connected the founder with Mountain America
Credit Union, where he was able to secure a $300,000
business loan
• The relationship allowed the loan to be financed without real
estate collateral
‐ The loan was secured under the SBA 7a program for aspiring
small business owners


Summary of SMB lending opportunity

Three kinds of Credit Union SMB lenders:

• Currently not active in lending
• Doing some lending
• At or near the 12.5% asset cap

The current market status and new technologies will help:

• Get started with SMB lending cheaply, quickly and easily
• Increase qualified member loans significantly
• Enhance the productivity and lower the risk of existing operations


Is your Credit Union already lending to SMBs?

Sign up to contribute to a special report on
SMB lending with Time magazine

Contribute to the Biz2Credit blog, which
houses user‐generated expert opinions
on the current state of SMB lending


Next Steps: Addressing the SMB lending opportunity

• Join us for coffee at 3PM
• Stop by our booth for additional details on how
to solve the challenges discussed today!
• On March 27 we will be hosting a Webinar


Q&A


Member Business Lending as a Source of Growth (Credit Union Conference Session Presentation Slides)

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