A Bankable Alternative for Financing

Special to The Times

When the owner of San Diego Leather had the chance to snap up 40,000 square feet of commercial real estate at her dream location for just $1.3 million, she jumped at it.

But her bank was less enthusiastic. It didn’t like the fact that the deal involved two older buildings, she said.

So Nancy Estolano turned to a local credit union. Soon she had a loan and the buildings, situated at a high-visibility location off Interstate 5 in National City.

“I’d never walked into a credit union before,” said Estolano, who owns the 20-employee manufacturing and retail operation with her husband, Mario. North Island Credit Union, which made the loan several years ago, now handles all her business banking, she said.


More small-business owners are taking a cue from Estolano. Business lending by California credit unions almost tripled in the last three years to $5.8 billion in 2005, according to the Credit Union National Assn. About one-third of the state’s 565 credit unions made business loans to members last year. A decade ago, just 15% of them did so.

Late last year, the USC Federal Credit Union and nine others in Southern California launched Business Loan Link (, a cooperative that solicits and coordinates lending.

Consultant Michael Hales, who helped put together the alliance, created nine others in the last three years and has four more in the works.

“It’s definitely a growing phenomenon for a lot of reasons,” said Hales, a former banker and current president of Counter Intelligence Associates, a credit union consulting firm in Laguna Niguel.

Credit unions are banding together or creating their own programs to serve their business members who want the kind of favorable pricing and personal service for which credit unions are known.

Too often, owners of small businesses complain, they are lost in the shuffle at bigger banks, where the personal service and handholding this type of client may need is not always available.

The banking industry’s consolidation has also left some small-business owners without the local banker they might have been used to working with. And some business owners want loans that are too small to be practical for many commercial lenders.

At the Business Loan Link cooperative, for example, two-thirds of the loans made have been less than $150,000, Chief Executive Jill Casselman said.

Without access to money to grow, whether in the form of working capital, an equipment or property loan or a line of credit, a small-business owner can have a hard time keeping the doors open.

Business lending at credit unions has also grown because of the broadening of the rules that determine who can be a member and thus benefit from loans.

Some credit unions are community-based. That means anyone who lives, works or worships in the community qualifies to be a member. Even traditional employer-group credit unions are looking to expand their reach.

Banks have not welcomed this development and often consider credit unions unfair competition. After all, bankers point out, the organizations are exempt from federal taxes.

“What we are seeing is a tax-exempt credit union industry that is aggressively growing and competing head-to-head for bank customers,” said a representative of the American Bankers Assn. trade group.

Community banks in particular are competing directly with credit unions for the same small-business customer, executives say.

Business lending, though, still makes up a small proportion of credit union loans. At the California credit unions that made business loans last year, that category amounted to just 10% of total volume. Nationally the figure was 5.8%, according to the credit union trade group.

And credit unions, which hold about 6% of deposits nationwide, still have only a small percentage of the business loan market on a dollar basis. In California, that amounted to 3.33% in 2005, the trade group said. Nationwide, it’s less than 1%.

That share is small in part because some credit unions find it too expensive to lend to businesses. Often they lack the expertise or the infrastructure.

Businesspeople typically want online banking and other services, such as payroll and merchant credit-card services, that many credit unions don’t offer.

Even those that dive in may find that business lending can be more complicated than they anticipated. Business Loan Link, with $70 million in loans outstanding, is off to a slower start than its member credit unions may have expected, Casselman said.

There has been a learning curve, she reports. Relationships with small-business owners can take longer to build, credit union staff members have to be trained to deal with business owners’ questions and management must be comfortable with the need for more negotiation when making lending decisions.

“It’s a totally different paradigm” from consumer lending, Casselman said.

The alliance handles marketing, due diligence, loan documentation and packaging. It presents loans to credit union management teams for approval. Underwriting is conservative, Casselman said, and about 70% of the loan requests are turned down.

At North Island Credit Union ( in San Diego, a staff of 12 handles business lending. The organization has invested in new computer systems and other infrastructure and changed its charter to accommodate business lending.

“We are still a gnat in the world of banking, but what we are saying is that we are trying to deliver a level of service that just disappeared from the marketplace,” said Jeff Stone, executive vice president of member business services at North Island. “That’s our focus.”

His credit union’s loan made it possible for San Diego Leather ( to move out of its cramped, 5,000-square-foot site and buy its own buildings after renting for almost 30 years.

The bigger space also enabled the company, which has revenue of about $2 million a year, to expand its retail offerings of leather jackets and clothing to include leather furniture and home accessories.

The comfortable lending relationship with North Island’s Gary Bryant, regional vice president of business services, was a relief to Estolano after bouncing around several commercial banks.

She recalled Bryant’s personal touch. “He said, ‘Sure we’d do it’ and he also said, ‘You are going to see me for a long time because we’re not going anywhere.’ ”

Cyndia Zwahlen can be reached at cyndia.zwahlen