Consumer Lending vs. Business Lending : Like Comparing Apples to Oranges

Credit unions fill a niche that banks often overlook. Sometimes people in great need don’t underwrite for loans, perhaps due to mistakes they made in the past or because of unfortunate life events. Here is where credit unions shine. Just because a member was overwhelmed with medical debt in the past, or they were never given a good opportunity to build credit, the local CU will not turn their back on their members. They understand character and work ethic can be bankable, and they can help with financing a used car to help someone get to work or help with replacing a furnace in the middle of winter.

Mathematically speaking, these aren’t terrible risks to take. While credit scores can help us assess some risk, a score hardly tells the whole story. Personal, in-depth knowledge about a person’s life situation and character is always a better tool for decision making. And realistically, any able-bodied human being has the capacity to repay a loan for a few thousand dollars. Any honest, working person should always have access to some credit for life’s necessities. C’mon, it’s just a few thousand bucks!

So what about credit to fund a business? Now we are playing in a different ballpark. First, a business venture is a risk an individual takes to be profitable. Business lending differs from consumer lending, because repayment hinges upon the profitability of an enterprise, and not someone’s wages.

When someone buys real estate as an investment, it is a business loan. When someone needs a line of credit to bridge the collection of receivables, it is a business loan. When there is a need to purchase equipment so work can be done to fulfill a contract, you are dealing with a business loan. Note that this is far removed from the member that is down on their luck that just needs a little understanding to gain access to necessities.

Understanding the risk in lending to a business is much different than understanding the risk in lending to an individual. Because the repayment means is much different, the math and statistics are entirely different. Business loans tend to deal with larger sums of money, which means larger potential losses. This leads to business lending being given more serious treatment overall, and thus, CUs must engage in business lending with the same standards that any bank would. In this case, we see less flexibility to help the member at any cost, because simply put, the cost becomes so much greater.

Character of the business owners matter, but now, risk to an institution’s capital matters much more. This creates the major rift on how CUs can approach business lending and consumer lending.  And for these reasons, financial institutions separate out the business lending from consumer lending completely. The consumer lenders report to a retail operations specialist, and the business lenders report to a chief credit officer. While it all may seem like lending money, they are different like apples and oranges.

A credit union should help honest members going through challenging times, because that is part of the credit union mission. And, credit unions should provide business loans, because it helps support jobs and economic development in the community. However, a credit union shouldn’t always exhibit the same flexibility in making business loans like it would in consumer lending. Believing in a member and their character is important, but giving them credit for a risky business proposition is like giving them rope to hang themselves. In this case, the CUs need to be on par with bank lending standards in the field of business lending.