Member Business Loans and Government Programs

Credit unions occupy a unique space in the world of finance. CUs exist to help their members when banks ordinarily wouldn’t provide services or will be a more expensive option, because they must generate a return for the bank owners.  Credit unions can also provide member business loans to small business owners who are typically overlooked, because they are not seen as a source of enough business. However, CUs need to be careful to not provide an MBL to a member, simply because they aren’t ordinarily credit worthy. But, there are various programs that exist, which help members with limited resources or those that find themselves in unique situations.

The Small Business Administration (SBA) is probably the most well-known government program that exists to help small business owners. There are two major products the SBA offers, which are known as the SBA 7(a) program and the SBA 504 program.

The SBA 7(a) program typically provides a 70% guarantee on all existing debt. A credit union which partners with the SBA to obtain this guarantee will find it is really more of a loss share agreement. The SBA doesn’t guarantee a fixed amount for repayment, they promise to take 70% of the loss if losses occur. This program is especially helpful when a business has acceptable income and cash flow, but an unacceptable collateral situation.

The SBA 504 program provides an extra loan to help business owners buy their owner-occupied real estate. Say a dentist wants to buy his office for $1 million. The credit union could make him a loan for $500,000 and then the SBA would give him a loan for up to $400,000, which would be secured with a second mortgage. This means the dentist would only need to provide a $100,000 down payment; whereas, ordinarily he would have been required to have a $250,000 down payment.

With respect to agriculture, CUs can obtain guarantees from the Farm Service Agency (FSA). In this case, the FSA has guarantees up to 90% of outstanding principal. Like the SBA, the FSA guarantee is really a loss share agreement. FSA programs also can help subsidize interest payments. The FSA programs tend to be helpful with ag members who have accidently gotten themselves overly leveraged, or are young producers that are starting out with limited resources.

Other great programs exist which may not be as well known. USDA Rural Development may guarantee loans up to 80% for commercial projects in rural areas. The Bureau of Indian Affairs (BIA) may provide a 90% guarantee on loans to businesses that are 51% owned by Native Americans. Also, many states provide their own economic development programs, where the State government may provide a guarantee, subordinated financing or interest subsidy for various situations.

By being knowledgeable in these programs, a credit union can give its members a great advantage. Members who have a strong business plan that would ordinarily be credit worthy, but are lacking some type of key credit enhancement, are those that benefit the most from programs like these. And, when a CU takes the time to learn these programs, they can carry out their mission of better serving the member and help them in situations where banks might ordinarily pass over them.