The foundation of every solid credit union member business lending (MBL) program is a proper loan structure, says Mike Steppenbacker, corporate banking director at Ent Federal Credit Union in Colorado Springs, Colo.
That foundation rests on four principles, says Steppenbacker, who conducted a breakout session Monday at the CUNA Lending Council Conference in Nashville.
A proper loan structure:
1. Clarifies expectations for a borrowing relationship. From the outset, engage in open dialogue about goals, future projects, other anticipated cash flow needs, debt repayment plans, and feelings about leverage. And don’t shy away from discussions about liquidity.
2. Ensures the borrower has “skin in the game.” How much money has the applicant pledged? The more the better, says Steppenbacker, who adjusts rates to give borrowers an incentive to accept these credit union-friendly structures.
“I would take interest-rate risk any day vs. credit union risk,” he notes.
Ent Federal favors faster than normal amortization schedules, which allows the credit union to adopt more customary market terms should a need for restructuring arise.
“We’ve done this to help people, and we really believe in it,” Steppenbacker says.
Be explicit about your plan, both at origination and during modifications.
3. Creates standards to maintain. Ensuring the primary source of loan repayment remains intact is your main concern. When Ent Federal financed a $5.5 million medical office building, concern existed over the nature of the business due to tenant turnover trends, which create facility improvement costs.
To ease worries that the borrower would have ample liquidity, the credit union requested as part of loan terms that the borrower set aside money into a holding account. That gives the borrower money to address short-term concerns—and, should that fund be tapped, provides an early warning sign to the lender that things are going south.
4. Minimizes risk from outside sources. Consider the implications of emerging debt restrictions, as well as the impact of rising interest rates. Also, scrutinize documents for loans consummated through other institutions.
Overall, credit unions should look to senior management and the board of directors for guidance on business lending parameters.
“As lenders, we can’t be experts in everything,” Steppenbacker says. “A credit union’s board and management team should determine which industries to serve or not serve.”
►Read more conference coverage from CUNA News, and get live updates on Twitter via @CUNAJennifer, @AdamMertzCUNA, @cumagazine, @CUNACouncils, and by using the #LendingCouncil hashtag. Learn more about the CUNA Lending Council, a member-led professional society for credit union executives, by visiting cunacouncils.org.