As the big banks adjust to the current credit climate, Canada’s credit unions appear to be well positioned to solidify their traditional strengths in the small, and medium-sized enterprise lending market, particularly if banks begin to tighten lending requirements to the SME segment.

“[The banks’ lending requirements] are tightening,” says Jamie Baillie, the president and CEO of Halifax-based Credit Union Atlantic, the largest credit union in Nova Scotia. “And it’s going to get worse.”

Baillie’s credit union is investing heavily in expanding its SME business, he says, both to take advantage of strong asset growth in that line of business over the past few years and to provide an alternative to local SMEs frustrated by loan rejections from banks.

Canadian credit unions have a traditional strength in lending to SMEs — businesses that are variously described as having 50 to 100 employees and up to $5 million in revenue, but which can also include enterprises as modest as a single-owner home-based business.

According to a research report published last year by the Toronto-based Canadian Federation of Independent Business, credit unions outside Quebec increased their percentage share of the SME market in terms of number of clients to 11% (in 2006) compared to 8.7% in 2000.

“A credit union actually has a better understanding of a local industry,” says Doug Bruce, director of research with the CFIB. “And, of course, if you have that, the credit union is going to have a much better understanding of the small -business client.”

Credit union loans to SMEs continue to grow, according to Bob Leshchyshen, an industry veteran who publishes an annual analysis of Canada’s largest credit unions. In 2007, Canada’s top 80 credit unions had a combined $21.9 billion in commercial mortgage and loan assets on their books, up 14.6% from the previous year, continuing on the double-digit growth trend of the past several years.

TIGHTER CREDIT

There’s no question, however, that SME owners are feeling the pinch of tighter credit conditions and a softening economy. A CFIB survey of SME owners conducted in mid-October showed that 28% were having problems accessing business financing. That had shot up from 18% the previous month and from 12% in September 2007.

Credit union leaders agree that their organizations are not immune to the current credit climate, both directly, in terms of the cost of funding loans, and indirectly, through the effects of softening economic conditions on the SMEs in their communities.

But they also believe that credit unions may have an opportunity to expand their share of the SME market if banks tighten lending conditions for SMEs. Credit unions can do this primarily by relying on their core strengths of focus on, and deep knowledge of, local industries and businesses in the communities in which they operate.

“You need to be a local financial institution to understand local market conditions,” says Sean Jackson, president and CEO of Meridian Credit Union in St. Catharines, Ont., the largest credit union in Ontario. Meridian has one of the most diversified commercial loan books among credit unions in the country, Jackson says, but has a particular focus on lending to hospitality and tourism businesses as well as grape growers and wineries.

“It’s a great business,” says Jackson about lending to grape growers and wineries. “But you need to know how to lend in this space. We have considerable expertise and competence.”

By virtue of their local focus, credit unions are able to consider factors such as the business owner’s character, quality of management, the business plan’s strength and knowledge of the local market. They can also carefully analyze the business’s balance sheet rather than just rely on a lending formula developed at a head office, says Baillie: “We can lend in the grey areas where banks don’t go anymore, because [with them] it’s purely formula driven.”

Credit unions also tend to keep account managers in place longer, in order to build stronger relationships with local business people and to give account managers more decision-making power at the branch level.

EXTRA VALUE

“In periods like these,” says Gord Huston, president and CEO of Vancouver-based Envision Credit Union, “we need to be as flexible as possible.”

As an example, Envision has been trying to help its SME clients with accounts receivable financing when they face difficulties in collecting, Huston says: “We’ll provide them with loans or change the terms of an existing loan to a longer period.”

@page_break@Credit unions are also trying to develop programs to provide extra value and services to local businesses and to fulfill their corporate social-responsibility mandates.

“We add value to our members by sharing with them what we see in the market, where property values are currently and future expectations, and advice on expense management,” says Shabir Amarshi, vice president of business banking at Vancouver City Savings Credit Union in Vancouver, “not only in their own operations, but also in their whole supply chain.”

For example, Vancity has developed an eco-efficiency loan program, which includes having an energy manager visit the business to provide advice on energy and cost-efficient upgrades that can be made to offices, factories, and warehouses. Loans are then structured with terms that match payments to anticipated energy savings.

Credit union leaders appear to be in agreement that although they are keen to build their SME lending businesses, they need to remain consistent and conservative in terms of their lending. None are under any illusion that they can slug it out with big banks in terms of access to funding, or in serving businesses that grow so large that they require national or international levels of financing and banking services.

But there is consensus that providing lending to SMEs in a new era of tighter credit plays to the credit union industry’s strong points. IE