As loans backed by the U.S. Small Business Administration have gained in popularity in Massachusetts – surpassing pre-recession levels – momentum is building to join the program, especially among credit unions.

The National Association of Federally-Insured Credit Unions recently renewed a deal with the SBA intended to encourage more credit unions to offer SBA loans, with a target goal of having 250 credit unions issuing 10 or more SBA loans outstanding.

“We are continuing to see interest,” Robert Nelson, director of the SBA’s Massachusetts District Office, told Banker & Tradesman. “We would love to see more credit unions sign up.”

Nelson said his office is currently working with three new credit unions – Taunton Federal Credit Union, Athol Credit Union and River Works Credit Union – to get them approved as SBA lenders. Those three would join the 29 other credit unions in the state that are approved SBA lenders.

A Long Process

Credit unions more than a decade ago expressed interest in becoming SBA lenders, but it has taken time. Greylock Federal Credit Union became the first SBA approved credit union in Massachusetts in 2006. But shortly after the Great Recession, the number of SBA-backed loans issued contracted in the state for several years.

SBA-backed loans began to rebound in 2013, and the NACFU and the SBA inked their partnership beginning in 2015.

In federal fiscal year 2016, the Massachusetts district office had a breakthrough, when financial institutions across the state issued 2,836 SBA-backed loans, up more than 1,000 since 2013 and more than 400 since 2007.

For federal fiscal year 2017, which ended Sept. 30, the numbers are expected to look similar.

Although SBA-backed loans are a boon because they do not count against a credit union’s business lending cap, they are typically used in business areas such as commercial and industrial lending where credit unions have not traditionally been involved.

“We have a relatively small commercial loan department, so we have been focused on lending in other areas rather than loans appropriate for SBA,” said Mike Murphy, assistant vice president of commercial lending at Shrewsbury-based Central One Federal Credit Union. “Typically, our commercial loans have been for vehicles for small businesses and commercial real estate where there is sufficient cash flow and enough collateral without the need to require an SBA guarantee.”

Murphy came to Central One five years ago. The credit union was an approved SBA lender, but he said it has not issued an SBA-backed loan during his time with the credit union.

“I think it’s a great program,” said Murphy. “It’s something we would certainly consider down the road, but we would need additional training through the SBA to get more experience with it.”

Central One is not alone.

Although 29 credit unions are SBA-approved lenders, only 15 have lent thus far in federal fiscal year 2017, according to SBA data, although Nelson said it is common for SBA loans to ebb and flow.

Credit unions are also entering a market that has long been dominated by community banks. Most of the top SBA lenders in Massachusetts this year are community banks; Eastern Bank takes the top spot, having already issued close to $70 million in total SBA-backed loans this year.

Paul Flynn, COO of BDC Capital Financing Solutions and New England Certified Development Corporation, both organizations that administer SBA-backed loans, said he thinks it is only a matter of time before credit unions get more involved.

“I think it is traditionally the type of lending focused on hiring the right people,” Flynn said. “As more credit unions diversify into more C&I business, hiring more lenders with more knowledge, I think credit unions will become a more formidable player in the game.”

Credit Unions Ready To Join Market

With more than 600,000 small businesses in Massachusetts and many growing sectors, there is a lot of opportunity for SBA-backed loans – and for potential SBA lenders.

St. Mary’s Credit Union was in the top 10 for SBA 7a lenders – loans for startup and existing small businesses for general business purposes – in federal fiscal year 2016, and it may do so again in federal fiscal year 2017.

Others are also looking to beef up their portfolios.

“We are starting to grow and our portfolio is expanding,” said Paul Gravellese, vice president at Liberty Bay Credit Union, who said the credit union, which became an approved SBA lender in 2014, has about 12 or 13 SBA-backed loans in its portfolio. “Over the next few months, we will definitely expand.”

Gravellese said there are certainly challenges with SBA loans, such as the amount of paperwork involved in the loan transactions, and the fact that financial institutions have to pay fees to the government in order to make SBA-backed loans, which are typically passed to the consumer.

Nelson agrees more education needs to be done all around, but he is happy with the track credit unions are on.

“SBA lending is specialized lending,” he said. “It doesn’t happen overnight; it is a process.”