Policy Documents

Can Credit Union Member Business Loans Meet the Need for More Credit to Small Businesses?

Katherine E. Howell-Best –
January 1, 2003

Despite the sluggish economy, Em Knight’s auto repair business, Kit Care, Inc., sped ahead.  As owner, Ms. Knight determined that a new trailer would be an investment in the economic growth of her shop, but she needed a loan for the purchase.  She visited her credit union in order to apply for the loan, the same credit union that provided her with the original financing of her auto repair shop.  Since the opening of Kit Care, Ms. Knight continued her membership with the credit union, but over the years she began using a local bank to meet the company’s financial services needs.  However, frustrated by the cost of obtaining financial services from the bank, Ms. Knight returned to her credit union to obtain the trailer loan.  Ms. Knight, remembering the ease with which she had obtained the loan in 1986 and taking into account her stellar credit history, assumed the credit union would promptly approve the loan.  To Ms. Knight’s dismay, credit union business lending is no longer that simple.

This Note discusses credit union member business lending regulations and considers the effect of these regulations on the unique role of credit unions in the financial services industry.  This Note first distinguishes credit unions from other financial services providers, such as banks and savings associations, by reviewing characteristics peculiar to the credit union industry. Part II of the Note defines a credit union member business loan and gives a brief regulatory history of member business lending. In Part III, the Note focuses on the complexity of credit union member business lending regulations. Part IV considers the effect of member business lending regulations on the ability of credit unions to serve their members’ business financial service needs and the significance of these limitations on the business lending role of credit unions in the financial services industry. In Part V,the Note offers potential strategies for capitalizing on member business lending and encourages credit unions to consider the potential growth available in this area. The Note concludes that, with a comprehensive understanding of member business lending and a strategic plan for managing member business services, credit unions are in a prime position to fulfill small business needs and that the very existence of unmet financial services needs for these businesses supports the argument that credit unions do not pose a serious threat to banks’ dominant position in the financial services industry.