Small Business Lending - Credit Unions Vs Banks

One of the who-knows-how-many battles currently going on in Washington is the battle between  credit  unions  and  banks . Current law limits  credit  unions ‘ business lending to 12.5% of total assets. The  credit  unions  want that raised to 25%, and  banks  are fighting hard to defeat that request. The reason that this is worth watching is that  credit  unions  that are willing to make small business loans (and many are not) often lend to smaller businesses than  banks  like to deal with, or lend smaller amounts than banks are willing to lend and which have all but dried up in the recession. According to government lending reports, loans to small business increased at  credit  unions  but declined at community  banks  in 2009.

Looking at it from the banks’ perspective, they have a couple of good arguments on their side. The best, and one that I would find hard to disagree with, is that  credit  unions  are non-profit lending organizations that enjoy tax-free status. It was because of that that Congress imposed the cap in 1998. The banks argue, correctly, that they have to pay taxes, so the playing field is not level, and it should be. The other argument on the banks’ side, although nowhere near as compelling as the tax issue, is that over the last two years, bank regulators have been beating up on banks to set aside more loan-loss reserves and strengthen their balance sheets. While this is something that should be done, it has hit community banks much harder than larger banks because their capital base is usually smaller, and it is the amount of capital on a bank’s balance sheet that determines the amount of money it can lend. When a loan is classified by a bank regulator, and thus a loan loss reserve set up, that loan loss reserve is against the bank’s capital even though the loan is not in default.

No matter how the battle turns out, I would argue that there is more than enough room for both to operate in the small business lending arena as long as the playing field is level. There is seldom too much money available for small business owners, and because the recovery from this recession is going to be very slow, small businesses need all the help they can get now, and there is not enough coming from banks. It is also a fact that there are not a lot of large, strong  credit  unions  across the country competing head-to-head with  banks  for small business loans. Plenty of  credit  unions  don’t, and don’t want to, do business lending, and it would probably take only a few defaults on small business loans at a  credit  union  to make them swear off small business lending permanently. There are plenty of opportunities for both  banks  and  credit  unions .

Source by Doug Carleton

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Small Business Lending - Credit Unions Vs Banks