Insight. Innovation. Industry.
Business / Finance /  •

Small Loans Big Payback

Lending to new Canadians or promising startups helps give budding entrepreneurs a leg up while helping build long-term member loyalty.

One of Cristian Bazan’s first jobs after moving to Vancouver from Mexico eight years ago was in marble restoration. Bazan enjoyed the work so much that he decided to start his own natural stone polishing and restoration company, Shiny Stone Care, in 2012.

As any small business owner knows, starting a company isn’t easy. It takes hard work, patience and capital. Bazan had the first two nailed but needed financing to buy his own polishing machine and industrial vacuum to get to work. He heard about a loan program called With These Hands offered by Vancouver City Savings Credit Union (523,000 members, $21 billion in assets) for entrepreneurs looking to buy equipment to start a business in the trades.

He took out a $5,000 loan to buy his machines and got to work. A couple of years later, once business picked up, Bazan received another $10,000 loan from Vancity to buy more machinery as well as to help market his business, including online through his website.

Five years in, Bazan says the business, which he now runs with his brother Carlos, is going well. Shiny Stone Care has built up a good reputation and Bazan says a lot of business today comes through recommendations from past customers. “People are referring us to new clients, which is good for us,” Bazan says. “Without the loans it wouldn’t have been possible.”

Many entrepreneurs like Bazan rely on micro loans to get their businesses up and running. Credit unions, which often cater to small businesses and have many of the same entrepreneurial values, have an opportunity to be the lender of choice for these startups. They are doing this by offering specialized programs and expertise to provide small companies with personalized business services and solutions.

Lending to new Canadians — or any promising startup — isn’t just good for entrepreneurs seeking capital but can also help credit unions generate business and long-term member loyalty. The
opportunity is particularly strong among new immigrants, many of whom are looking to build a life for themselves and their families in their communities for generations to come. “Reaching newcomers in their earlier stages of settlement — to help them become economically productive and
integrated into their communities — is important to credit unions and what we understand about building healthy communities,” says Catherine Ludgate, manager, community investment at Vancity.

“We believe that it takes more than a loan to make a business or individual successful.” – Susan Henry

Ludgate points to Bazan’s stone polishing business as one of many successes Vancity has seen through its various small business lending programs. “Cristian Bazan had a clear passion and relatable skills,” says Ludgate. “It paints a picture of how small and incremental investments put him on the road to success.”

Personal loans first

At Vancity, as well as other credit unions, the small business relationship often starts with providing personal loans, which helps members build a credit history and starts their companies on a solid financial footing. Ludgate says there’s a strong emphasis on financial literacy during this stage, which in turn helps increase chances of startup success down the road. “Literacy before lending is the most important thing,” Ludgate says, “making sure that all of our members understand how to use credit, how compound interest works and the importance of paying off the full balance each month. It’s part of being bankable and included in the economy.”

And while some financial institutions might balk at lending to new Canadians, Ludgate says the repayment rate on personal loans at Vancity has been “phenomenal. This is not risky lending. They work incredibly hard. They pay back their loans.”

The payoff for credit unions is long-term member loyalty and word-of-mouth referrals for others looking for loans to start their own companies. Ludgate says she regularly hears from members who thank the credit union for supporting and trusting them as they established themselves in Canada. “It’s the best kind of lending, to my mind.”

Christian Bazan, formerly of Mexico, started a marble restoration company with a micro loan from Vancouver City Savings Credit Union.

Micro lending does require credit unions to ramp up resources and provide a more personalized service. Ludgate describes it as “high-touch lending,” which means more face time with members and a deeper understanding of what it’s like to start and run your own company. “Each member has a unique story to tell and they deserve someone to take the time to listen to that story and to stress test that cash flow,” Ludgate says. “That’s time well spent. It’s not expensive time if it leads to their ongoing business success, their loyalty to the credit union, the return of other members’ money so we can make other loans and a more inclusive community where people are treated equitably and are economically productive. That’s worth doing.”

More than a loan

Alterna Savings and Credit Union (133,309 members, $4.2 billion in assets) started its micro finance programs in 2000, in part to help mitigate poverty and build communities. The target has been the working poor, people on government assistance or newcomers to Canada who don’t have
a solid credit history. The program also caters to social enterprises whose business models may be difficult to finance, as well as women entrepreneurs. “When we look at micro finance we look at where there’s a gap, a need that’s not being filled by traditional nancing and we want to fill it,” says Susan Henry, Alterna’s manager, community investments.

To date, Henry says Alterna has provided more than 850 micro loans ranging from about $1,000 to $25,000, totalling $4.5 million. The average loan today is about $7,500, up from $5,000 just a few years ago. Many of the businesses Alterna lends to are service companies ranging from photographers and event planners to consultants.

Alterna also offers its members education and advice on how to run and manage their business, which in turns helps both the owner and the credit union. For instance, Henry says Alterna recently offered seminars to help business owners learn more about sales and marketing. “Once they get this knowledge and build their business, it will help us as well,” Henry says. “We believe that it takes more than a loan to make a business or individual successful.”

Alterna also offers financial literacy, or what it calls “wrap-around support,” which benefits both the credit union and the business. “It’s a win-win situation,” Henry says. “If they succeed then we
as a credit union succeed because they will be able to take advantage of other financial products and services.”

The credit union also stays in touch with its business-owner members, checking in about once a quarter to see how they’re doing and if they need any support. “It lets them see you care about the business and sometimes they need some other help and we are able to refer them,” Henry adds.

Dilys D’Cruz, vice-president strategic partnerships, wealth, small business, mortgage channels at Meridian Credit Union (309,705 members, $14.7 billion in assets) believes credit unions take a different approach to small business lending than traditional financial institutions. “We are very local. We are embedded in the community. We work with the businesses,” D’Cruz says. “We try, from a packaging perspective — whether it’s deposits or lending — to look at the different targets and what the needs are.”

Meridian visits its members’ businesses, as needed, to help them with their banking needs. Quite often they don’t have the time to come to the credit union, D’Cruz says. “So we’ll go visit them and give them the personal service.” The credit union, she adds, also works with innovation hubs to help provide education and support for entrepreneurs looking to start, grow and build their companies.

Long-term member alignment

While micro lending may not be a huge profit maker for credit unions, Henry says it’s a brand differentiator for Alterna and helps to build a loyal client base over the long term. One benefit of helping out small businesses is that some may turn to the credit union for other financial needs in future, including for their personal saving needs. Henry says Alterna often reminds small business owners that, alongside their company, they should also plan for their own future after work.

“When you start the business you’re so focused on the day-to-day that often you forget about the future,” Henry says. “What we don’t want to see is that, 20 years down the line, they’re ready to retire and don’t have a succession plan or they don’t have retirement funds and can’t retire. It’s important for us to make sure they’re speaking with a financial planner who can help get them on track.”

D’Cruz believes small businesses often benefit from combining their personal and business banking services under one roof and receive more holistic advice. She also believes credit unions are often sought out by small business owners because of their similar values. “Our spirit, in terms of how we operate and our core values are much more aligned to small business. And our members tell us that all of the time too,” D’Cruz says. “We always say, ‘we have your back’ and it’s true. It’s not a product push or just a number. You really get to know people on a personal level. I think for small businesses, that’s what really stands out.” ◊