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Financing

Borrow from a credit union?

Joe Bennett was finally ready to buy his own restaurant, an established 100-seat eatery in St. Paul, Minnesota, and he needed a loan. He’d been in the business for 25 years—including stints as VP of operations for Grandma’s Restaurant Co. in Duluth, and director of restaurants for Morrissey Hospitality Co., also in St. Paul—and figured his experience and track record would win him the financing he needed. But Bennett’s bank passed on a business loan, instead recommending he take out a home equity loan.

Joe Bennett was finally ready to buy his own restaurant, an established 100-seat eatery in St. Paul, Minnesota, and he needed a loan. He’d been in the business for 25 years—including stints as VP of operations for Grandma’s Restaurant Co. in Duluth, and director of restaurants for Morrissey Hospitality Co., also in St. Paul—and figured his experience and track record would win him the financing he needed.

But Bennett’s bank passed on a business loan, instead recommending he take out a home equity loan. “That wasn’t going to help me with my credit rating at my new place,” Bennett recalls. “I needed the loan to come through my business.”

At the urging of friends, he contacted a local branch of the Twin City Co-ops Federal Credit Union. “Right away they got me in touch with the head of business development, and he was very receptive to what I wanted to do,” says Bennett. In early July, he completed his application for a $50,000 down payment, plus another $50,000 for improvements that included painting, new interior artwork, a new sign and awnings.

Three weeks later the money was approved.

Across the country, credit unions are expanding their loan programs as small- to medium-sized businesses seek alternatives to traditional funding sources like larger banks. Last year Minnesota had the highest year-to-year increase in the percentage of credit unions offering business loans—9.1 percent over 2004. That boosted the percentage of credit unions doing business loans in the state to 37.3, according to the Credit Union National Association—but it’s hardly alone. Maine, New Hampshire, Florida, Oklahoma, Kansas and Montana also saw year-to-year increases of up to 8 percent. In Maine, that translated to 43.2 percent of the state’s credit unions engaged in some form of business lending. Nationally, 21.1 percent of credit unions engaged in non-agricultural business lending last year, up from 18.4 percent in 2004.

Experts point to a changing banking landscape as the key reason why more small businesses are looking to credit unions for business loans and working capital. The banking industry has undergone enormous consolidation in recent years as big banks have been acquired by bigger banks, and with that has come the perception—and sometimes the reality—that banks aren’t as responsive to local needs as they once were.

Credit unions, by contrast, are member-owned non-profit organizations—membership can be organized around where you live, where you work, where you go to church and so on—that focus on service rather than profitability. Their non-profit status means they don’t pay federal taxes, which helps them undercut the interest rates offered by banks, and their community orientation helps them remain responsive to the needs of smaller operators. In addition, more credit unions nationally are participating in the Small Business Administration’s loan guarantee programs, further raising credit unions’ profile as a source of small-business capital and expertise.

“We’ll actually go out and visit small business owners, help them structure loans, and help them build their business plans—no large bank is going to take the time to do that,” says Jill Casselman, chief executive of the Business Loan Link, a cooperative of 10 credit unions in Southern California that pool their resources for a wide array of business lending, including restaurants. About two-thirds of the loans made by the Business Loan Link since it launched in October 2005 have been less than $150,000.

While Casselman can’t say how much an operator might save borrowing money from a credit union as opposed to a bank, she points to a credit union’s core mission—returning profit to the community in the form of lower interest rates and fees, as well as an emphasis on member services—as a good place to start. “We also have more freedom to structure deals than banks do,” she says. “We can find strengths in the deal that banks may not be willing to look at.”

Casselman’s Business Loan Link is part of a trend among credit unions to band together to form what’s called credit union service organizations, or CUSOs. About 50 credit union cooperatives exist nationally, she says, and the number is growing rapidly. “CUSOs offer us an opportunity to share the expense of expanding the number  of products we offer, and they offer a huge advantage to small business owners in terms of cost and service.”

Bennett is just happy that he had an alternative to the bank he’d done business with for years; he was reluctant to leave, he says, but ultimately the credit union offered him exactly what he needed.

“They were willing to believe in me and my experience and my business plan,” he says. “Now I tell everybody I’m living the American dream by owning my own small business.”

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