A 2015 survey by Small Business Credit for the Federal Reserve Bank in New York finds that loans to small businesses from local credit unions gave the 2nd highest rate of satisfaction from their borrowers who were approved for loans. This situation may become even better because of a key change in credit union policy: the PG (personal guarantee) may no longer be a requirement for small business loans.
This is a significant change, recently adopted by the National Credit Union Administration Board. This revised MBL regulation will start in mid-May of 2016. Nationwide business loan approval rates in general have hit new highs as well.
Chief advocacy officer Ryan Donovan of the Credit Union National Association thinks that because personal guarantees mandate that borrowers are personally liable for unpaid business debts, it tends to make the lending procedure drag. Donovan notes that other types of lenders don’t always have the same kind of restrictions or caveats.
Why are PG’s a problem for small businesses?
A small business loan has a tendency to be larger than just a personal loan, and that means the business owner is taking on a much more substantial risk, as well as being riskier to the originator of the loan. Even if a person leaves a company they are still responsible for the loan if the business fails to pay on time.
And getting a PG can involve intrusive personal credit checks, which may have an affect on personal credit scores and not on business credit scores.
A lender or a credit-extending vendor are properly concerned about having a personal guarantee in case the business goes into default. The PG is also a very strong motivation for someone to take responsibility for the original loan and get it paid off, no matter what. However, those startups or businesses that come looking for loans with a strong financial background already established are often given preferential treatment and can sometimes bypass personal guarantees — especially if they shop around for compliant lenders.
So if your business is young and/or doesn’t yet have a well-established financial track record, you may be forced into doing a PG to get the capital you need.
It should be noted that the new regulation will not stop credit unions from requesting personal guarantees on loans for small businesses; it will probably boil down to a case-by-case protocol. Donovan thinks that the final decision will be with the boards of each credit union system.
One more change is that credit unions will be enabled to purchase business loans from any other credit union — which will not prejudice against the buying credit union’s lending business ceiling. It’s expected that this will stimulate small business lending between credit unions, plus it could make more funds available.
The plus-side of getting a small business loan from a credit union.
Since credit unions are all not-for-profit groups, a small business loan from a credit union could have lower interest rates than one originating elsewhere; i.e. account-receivable financing or merchant cash advance. A lot of credit unions now proffer both secured as well as unsecured loans. Plus these places can be more attuned to the micro-economy in the local business community. This in turn means they may be will to take more chances with a local business that looks promising but is having a tough time getting enough financing.
According to Ph.D David M. Smith, who has made a study of these things, while banks were hit hard by the Recessions in 2001 and again in 2007, credit unions rode them out with relative impunity — this is shown by the fact that banks had a negative commercial growth rate for loans, while credit unions stayed in the black.
The other side of the coin is that many credit unions have member restrictions — so if you don’t meet their requirements ahead of time you can’t pursue a loan with them. Plus a few credit unions only offer very limited types of financing instruments for a small business.
The bottom line, though, is you should definitely look into financing your business, new or old, through the good offices of your local credit unions. A little time and effort can reap you a splendid loan harvest!
