Although credit unions have made business loans since their beginnings more than a century ago, many struggle to do so today for a variety of reasons.
Gesa CEO Christina Lethlean made business lending a priority when she joined the $1.1 billion asset community credit union in 2007. At the time, the credit union wasn’t keeping pace with the growth of the community, and members indicated they wanted business loan and deposit products.
The challenge was to position Gesa as the area’s business lender of choice. Mission accomplished: Its member business loan portfolio has grown from $35 million in 2009 to $47 million at year-end 2011.
Benjamin Rutledge, Gesa’s vice president of commercial services, cites three main elements to the credit union’s success.
1. Find the right people
If you can’t find experienced business lenders that fit the credit union model—too many lenders got burned by risky loans during the recession—hire smart, trainable.
Gesa started its own commercial lending training program. “The demand for commercial lenders will get greater,” Rutledge says. “Find bright college business graduates, start them as commercial credit analysts, and in three to five years they can become commercial loan officers.”
He says many banks stopped training commercial lenders from the mid-1990s to the mid-2000s. At the time, banks’ main focus was on improving efficiency ratios and improving shareholder value, so training often was cut, Rutledge says.
2. Promote safety and soundness
Safe and sound lending practices must be present in everything: the borrower interview, underwriting, documentation, loan file auditing, and portfolio monitoring, Rutledge says.
“From 2000 to 2010, commercial lenders were cutting corners and borrowers were dictating the terms of the deal,” he says. “They were not monitoring or documenting loans properly. We tell our new hires that our business lending culture is conservative, safe, and sound.”
Gesa’s business loan officers must earn the trust of executive management, directors, and state and federal examiners.
Some lenders have the misconception that business lending is the same as consumer lending. “Consumer lending fits into a box,” Rutledge says. “Loans are funded and go out the door. Only if there are problems does the credit union get involved” after funds are disbursed.
Commercial loans are quite different—the lender communicates with business owners frequently. Gesa, for instance, checks in with business members annually or quarterly to see how they’re doing.
“We are constantly in front of our business borrowers,” Rutledge says. “If a loan is deteriorating, we develop a plan for the credit union and work with the owner to develop a plan for the business.”
3. Forge strong relationships with borrowers
Gesa places a premium on relationship with business borrowers, and it offers a full range of services to strengthen that bond.
“We essentially become a person of influence as their lender, like a CPA or attorney,” Rutledge says. “Our commercial services help business members succeed. We do everything we can to help them—we give them options.”
Even though a business lending credit union service organization (CUSO) is a good option for many credit unions, Gesa created its business services area in-house. The credit union does use a CUSO for appraisals, and it will use a CUSO in the future to audit its Small Business Administration loan portfolio.
The relationship between commercial services and credit union departments is “symbiotic,” Rutledge says. “We sometimes require key man insurance, for example, and we provide this through our financial services department.”
He says commercial loans can be profitable and a steady stream of income for credit unions—and a means to help members make their way in the small business world.
Stay tuned: The second of this six-part series will examine how Northeast Community Credit Union serves rural communities with low-cost mortgages.