Over the past decade of low interest rates, Canadian credit unions have become increasingly dependent on mortgage lending to grow their loan books. According to the Canadian Credit Union Association (CCUA), residential mortgage loans now account for an average of 66 percent of all credit union loans, while commercial lending represents 27 percent.
However, the increase in interest rates, the Guideline B-20 stress test for borrowers, government policies designed to cool growth in the housing market and affordability concerns in certain cities makes competition—and ultimately continued growth—in retail mortgages more challenging.
That’s why several credit unions are making gains in their commercial loans segment a priority. And with credit unions dedicating new resources to this area, they are finding the small- and micro-business segment (from one to 99 employees) to be an attractive niche that offers potential for sustained growth.
This partnership is becoming more and more important to credit unions’ bottom line. By serving the needs of entrepreneurs and their businesses, credit unions can simultaneously reinvest in their local economies, stay true to their values through their lending and maintain their financial sustainability by diversifying income sources.
Entrepreneurs benefit from a financial institution that brings breadth of knowledge—the strengths, weaknesses and opportunities of the local economy—and a real emphasis on supporting small business owners as long-term members rather than account numbers.
At Nova Scotia’s Valley Credit Union (11,000 members, $171 million in assets), commercial lending increased by 66 percent to $35.8 million in 2017 from $21.5 million in 2015. Stu Gould, Valley’s senior commercial relationship manager, explains what’s driving the trend. “We’re seeing growth because we’re doing things different from our competitors. We ask a lot of questions. We do a lot of on-site inspections. We shake a lot of hands and we have a number of frank conversations,” Gould says. “Everyone in our industry says they ‘relationship bank’ but I don’t think anybody can do it like a credit union.”
Gould notes that, in a rural area, focusing on small business has been a key differentiator. “The banks are fighting over the same dozen clients in our market; we’ve found a solution that helps a larger segment of that market. That’s where we’ve found our sweet spot and where we’ve excelled with the growth over the past few years.”
David Kovacs, senior vice-president of business banking at Alberta’s Servus Credit Union (363,000 members, $15.4 billion in assets) is responsible for overseeing growth in the commercial market. “We are interested in serving small businesses. We know that’s a signicant contributor to the economy and on the other side of it, it’s a strong contributor towards the profitability of the credit union,” Kovacs says. Servus’s main focus is micro-small businesses—a segment employing less than five people—which represents 95 percent of the enterprises in Alberta. “That’s our area of success.”
Shaun Adams, director of small business lending at Ontario’s Meridian Credit Union (322,409 members, $15.4 billion in assets), says small business is becoming more of a priority. “We’re putting a lot of thought, energy and resources into sole proprietors, small partnerships, start-ups and micro businesses; there’s a lot of opportunity.”
Vancouver City Savings Credit Union (523,000 members, $21.7 billion assets) is bullish on the freelancer/independent worker micro segment. “We forecast that there will be more financing required to support this growing sector,” says Eric Bulmash, manager of community business and investment strategy. Growth also means providing advice and other small business-tailored products and services, Bulmash adds.
And while the segment offers a long runway for growth, small businesses transactions are, in general, more complex, says Adams.
Small-business owners often choose their financial institution based on factors that go beyond the products they offer. They are looking for an institution that can help them strengthen their finances and then expand their business. They are more likely to shop around for the best possible rate and have access to federal, provincial and municipal assistance programs.
Entrepreneurs in the freelancer/independent worker category offer unique products or services that make assessing their assets, cash flow and potential for sustained revenue growth more difficult. Many of these independent gig workers are also less likely to have health insurance, a pension plan or other traditional safety supports to fall back on if their businesses don’t succeed. Furthermore, it takes time for the profit of new businesses to generate sufficient capital to fund future growth.
Professional development vital
In anticipation of the growing market and need for skilled business lenders, Cusource Professional Development and Education partnered with numerous credit unions to develop and pilot a Business Professional Development Program (BPDP). By leveraging a coaching model and virtual collaboration platform, this year-long development program provides monthly topics, exercises and mentorship opportunities for credit unions leaders to expand their business-lending expertise and target and grow their commercial business.
When a credit union is successful in winning a client’s account, they benefit from higher yields compared to retail mortgages and a more diverse set of revenue streams that can be used to support the credit union’s aims.
But commercial banking is not without competition. To stand out, credit unions are building genuine, long-term relationships based on the entrepreneur’s story and vision. “The big message is that what we’re going to do, regardless of where we are or who we are sitting across the desk from, is learn their story,” says Adams. “That is the critical thing. What is the business story in front of me?”
At Servus, small business advisers are looking beyond traditional metrics like industry, sales, number of staff and focusing on where a business is in its life cycle. Is it a startup, expanding, mature, or in the secession stage? These need to be determined to assess needs. These additional criteria allow Servus to better tailor its services to what the entrepreneur requires to provide greater value throughout the life of the relationship. Servus’s small business advisers are also empowered to make loan approval decisions up to $350,000 on the spot, which fosters a relationship with the member that chartered banks have trouble matching.
At Valley, the emphasis is on the member’s needs. “We try to find ways to make dealing with a credit union easier,” says Gould. “I’ve been here for seven years and I can count on one hand the number of files I’ve lost to a chartered bank. We don’t compete on price. We compete on value.”
Ultimately, the key differentiator and value proposition that credit unions bring to their competition with banks is the relationship they can form with the business owner and theirvcomprehensive understanding of the community they serve. Small businesses face a myriad of challenges. These include minimum wage increases, an increase in Canadian Pension Plan contributions, higher rents in
major markets, uncertainty with the North American Free Trade Agreement negotiations and future
interest-rate increases. Credit unions can capitalize on their local knowledge and experience to assist small business members in working through this difficult environment.
Quarterbacking small business
With a sound understanding of the market the entrepreneur operates in, Servus’s advisers can provide advice and assistance. “Our adviser is the quarterback for times both good and challenged,” says Kovacs. “We don’t want to be a rainy day lender where we are not supporting you when situations have changed.”
At Meridian, understanding the unique aspects of each market they operate in, whether it’s real estate costs in Toronto or the evolution of the auto sector in Windsor, serves as an anchor when they assist entrepreneurs navigating these headwinds. “Each market is going to give you unique aspects and we make sure we are aware of them,” Adams says.
In a rural environment, a physical presence is invaluable. “Because we live, work and play in these communities, it gives us a competitive advantage to be able to better understand the businesses we partner with,” says Gould.
As the retail mortgage market becomes more competitive, several credit unions are using their culture to attract new members and grow their commercial loan books. It hasn’t gone unnoticed.
According to a survey of 11,000 small business owners commissioned by the Canadian Federation of Independent Business (CFIB), credit unions continue to be the top performers when it comes to fulfilling their financial needs. CFIB president Dan Kelly notes “it’s clear several [banks] have a long way to go to match the overall customer satisfaction small business owners have with credit unions.”
This is easily explained by Gould. “The banks are concerned about their sales targets and, honestly, we’re not. We’re concerned about maintaining our portfolio and growing it through relationships and value-added solutions. We’re not a sales business, we’re a service business that happens to sell.” ◊