Community credit unions here got a lesson in "Business Lending 101."
Speaking to the National Association of Community Credit Unions' Fourth Annual Conference, Jean Faenza, executive VP of Telesis Community Credit Union and Steve Von Rajcs, president of Arrowhead Credit Union's CUSO, Member Business Services, offered far more than just the basics.
"The potential is enormous," said Faenza, noting that some 12-million individuals claim business income on their tax returns. With CUs serving nearly 300,000 select employee groups, many of which include small businesses, there is a sizable market to be served.
Added Von Rajcs, "Word of mouth will bring you business. (Small business owners) want local service, they don't want to work with large banks, and if you already have their personal business, they will give you their business' business as well."
According to Von Rajcs, MBLs not only serve member needs, but can boost loan-to-deposit ratios, increase yields (Arrowhead's portfolio is yielding 7%, Telesis' 8.17%), develop the primary banking relationship, and attract new members to the credit union.
And there is fee income to be made, pointed out Von Rajcs. Commercial account holders are accustomed to paying for document fees, payroll and cash management services, he observed. Moreover, referrals to the credit union's CUSO can result in insurance sales and investment relationships, as well.
Best of all, said Faenza, "your credit union's image will be greatly enhanced as you become known as a full-service' institution."
Among the advice shared by Faenza and Von Rajcs:
* Determine your targets: commercial property, equipment, machinery vehicles, etc.
* Define your niche: what products you can support.
* Set limits for loan types and sizes.
* Be prepared to hire the best, most experienced underwriters you can-ideally with a minimum of six years commercial lending experience. "Raid the banks!" urged Von Rajcs. "Limit your risk by making only good loans. Don't make any 'good old boy' loans. I don't care if he is the president of the Chamber of Commerce!"
* Solid documentation is essential, said Faenza, whose credit union does substantial MBL business. She called for three years of tax returns, three years of financial statements, proof of all key assets, credit checks and the presence of a sound business plan. Get detailed appraisals and follow up with site visits, and maintain and manage thorough commercial loans management to assure the business is true to the terms of the loan, she said.
Faenza added that such procedures can go a long way toward preventing fraud, which is more prevalent on the commercial than consumer side (and can mean greater losses, too).
* Outsource services whenever possible to lower costs and develop third-party alliances such as payroll and merchant bankcard services. Refer armored car pick-ups for client convenience when needed for safety.
The average business loan made at California's Arrowhead Credit Union is $225,000; at Telesis, it's a whopping $783,000. Faenza and Von Rajcs both agreed that while competition can be great, most banks are not making this size loans because they are interested in larger loans.
Through its CUSO, Telesis packages loan participations for sale to other credit unions and banks. Faenza recommended that federal CUs nearing the regulatory cap of 12.25% of assets in business loans also participate out their loans. (Telesis was grandfathered under CUMAA and can exceed that cap level).
