Is credit union funding the way forward for Welsh businesses?
Taken from an article first published in the summer 2010 issue of the IWA’s journal, Agenda and then subsequently on Click on Wales, the IWA’s news magazine.
Chris Jones, of ClickBridge Solutions in Llandeilo, suggests we should be using credit union finance to kick start business in Wales.
“An over-riding constraint on the Welsh economy is the inability of money to flow to business, the so-called credit squeeze. This lack of business finance is due to business’s over reliance on globalised high street banks such as Lloyds TSB, HSBC, Barclays and the like.
“So what can business do? What suitable business finance models are there for the businesses of Wales? I believe that a better business finance model already exists in the USA where business is routinely financed by credit unions.
“During the great depression in America credit unions were established to act as conduits for New Deal federal funds used to build dams, roads, electrification and other forms of basic infrastructure. Some of these have flourished and still survive. The basic fact is that many businesses in the USA get their finance not from high street banks, but from various types of credit unions.”
Regional credit unions
“A crucial dimension of American-style credit unions is that they are ‘locality’, or regionally based. They are professionally managed, and often capitalised by Federal and State payroll money flow. Although interest rates and credit scoring are comparable to those of high street banks, the difference is that, being regionally based, credit union managers have more knowledge of local economic situations and much more responsibility and discretion about how they manage their lending.”
“Critically, a highly beneficial aspect to business of US credit union lending is that it is generally tied to some form of a turnover model of repayment. This means that repayments are geared to the performance of business. At its most basic, if there is no turnover there is no loan repayment.
“For example, a business may have a bad month of trading where its turnover goes below an agreed threshold that would normally trigger a loan repayment. In this case, the loan payment is rescheduled automatically until the agreed threshold is reached. Alternatively, the loan term period is extended. A variety of penalty-free agreements can be negotiated.
“In contrast UK businesses that borrow from a high street bank have to meet their monthly repayments, regardless of the economic situation. In addition, the penalties for default are often sufficiently onerous to cause businesses to fail.”
Currently no Welsh equivalent
However, the credit unions we are familiar with in Wales cannot be compared with American US-style credit unions. Jones believes that it would only take one Welsh county council to pass its payroll through one properly constituted US-Style credit union to initiate a fundamental and beneficial change in Welsh business financing at the local level.
Wales could be part of the quiet Move your Money revolution currently sweeping America. Currently people and businesses are bypassing Wall Street and Main Street and returning to financial systems that survived the great depression and are far more suited to their individual localities. Here is a model for Wales to follow.
Read the full article on Click on Wales