MBLs Offer ‘Chef Salad’ of Benefits for Lenders, Economy
Business lending requires strong relationship-building, which favors CUs.
Credit unions have provided business loans since their beginnings more than a century ago. But like student loans, they are sometimes given and recorded as credit cards or home equity loans.
After the recent financial debacle, more Americans are becoming entrepreneurs. They are powering the economy and the recovery as small businesses now number 26 million or 98% of all enterprises in the U.S.
An informal debate within the industry, though, is quietly taking place on the best method to provide member business loans—internally or externally, says Kent Moon, president/CEO of Member Business Lending LLC, the nation’s largest business lending credit union service organization (CUSO).
He says business lending is poised to take off in 2013. The U.S. House of Representatives authorized $16 billion in Small Business Administration (SBA) 7a lending authority for 2013, a 33% increase over 2012. That was with a Republican-controlled House that rejected most spending increases for the past two years.
“If credit unions capture just 6% of the SBA 7a market, it would triple the current credit union 7a loan balances,” says Moon. “In doing so, they would become a significant contributor to the national economic recovery.”
SBA loans offer a chef salad of benefits for lenders. For starters, there’s reduced risk, as 50% to 85% of the loans are guaranteed by the government. Only the unguaranteed portion of the loan counts against the credit union business loan cap of 12.5% of assets.
Additionally, there’s a ready secondary market for SBA loans, on which credit unions typically earn a 3% to 5% return.
Even though credit unions have made business loans since their early years, many consumers aren’t aware they do so, just as many consumers are oblivious that credit unions offer mortgages. Because 68% of business comes through word-of-mouth, Moon says, the lender’s reputation is critical.
The branch is key
Small businesses are relationship-oriented, not focused on transactions, Moon says. It’s this relationship factor that favors branches and credit unions, which are known for service rather than a devotion to quarterly profits.
Typically, there are 1,800 businesses, $80 million potential deposits, and $130 million in available loans within two miles of the average branch, Moon says.
“Branches are the key delivery channel,” he says. “Some 60% of business owners and senior staff visit a branch; they average about 18 branch visits per month.
“You need a relationship with the business owner,” he continues. “Small businesses need a revolving line of credit, which can be risky. Don’t be afraid of risk. When risk is adequately monitored, losses are reasonable and business lending is profitable.”
A common misstep is to hire one person to manage all small business needs. This can lead to mistakes, Moon says. “You can’t succeed if you try to do commercial lending on the cheap. Businesses aren’t looking for the least expensive option; they’re looking for the most knowledgeable, efficient, and reliable lenders.”
Find the right business development officer
Credit unions need—at a minimum—one business development officer to act as liaison with the CUSO and to serve members. There is no minimum asset size needed to make business loans, but Moon says the organization should have sufficient volume to pay for the salary of a business development officer.
With the recession and many financial services professionals looking for work, many assume a buyer’s market exists for business development staff. That’s not the case, however, as qualified business lending staff is scarce, expensive—and likely working for a commercial bank that can afford high salaries.
Business development officers need a balance of both social and analytical skills. They should be outgoing and willing to venture into the community to get business.
Historically, many credit unions wait for the business to come to them, Moon says, which is a recipe for irrelevancy in today’s competitive environment.
He says the ideal business loan officer possesses fluency in commercial lending analytical skills, as well as skills in financial reconciliation, trend analysis, cash flow, liquidity, and credit decision-making (both personal and business).
While it may be a challenge to locate a qualified business development officer, it’s possible to train one. A recent college graduate with a business degree, a basic knowledge of accounting, and high energy, and a self-starter attitude could become an effective member of a business development team.
Too often, there is an emphasis on the front-end of the loan with a lack of portfolio monitoring. Moon calls this “lazy banking,” an affliction that frequently inhabits both credit union and community bank operations.
“As an industry, we usually have adequate underwriting on the front-end, but we often fail to do the monthly monitoring of the portfolio,” he says. “Because of this we don’t react to deteriorating portfolio quality.”
This can—and often does—lead to a lack of an exit strategy. If the problem loans are given to attorneys, their answer typically is to litigate. “It’s better to monitor the portfolio and respond before problems occur,” Moon says. “Often, the response is too late when liquidity is gone.”
Also, lenders should offer a full range business loans, including those for:
As the U.S. economy continues to recover and restructure, small businesses continue to play an essential role. Credit unions can help with cash management, a full range of products, and a willingness to serve as a partner for the long term.
Moon addressed the CUNA Lending Council Conference in Miami earlier this month.