ATLANTA -
With that in mind, the Credit Union Journal polled a number of business lending experts on how credit unions can avoid common pitfalls, or dig themselves out of any holes they might dig themselves into.
1) Hire MBL specialists with plenty of experience in the field-and not just in lending. This single mistake was just about the first piece of advice shared by every single source for this story. "One of the initial challenges has to do with staffing," said Warren Cole, senior lending consultant for Harland Financial Solutions. Murray Halperin, SVP-marketing and business development for CU Business Capital, agreed, adding "Don't expect bank lenders to know the operations and servicing side of the business. Hire experienced operations and servicing people or find a CUSO that has these departments properly staffed."
2) Don't treat business loans like consumer loans. From the underwriting and documentation to the servicing of the loan, MBLs require a whole lot more than their consumer counterparts, the experts suggested. "Sometimes you see credit unions that aren't monitoring the loan and the business properly once the loan is closed," said Sue Pogatschnik, CU Market Segment Manager for Wolters Kluwer. "With a commercial loan, you have to have ongoing monitoring to make sure that the business is still in business, that the property and collateral is still in good shape." Similarly, credit unions often have loans on the books as consumer loans that actually are business loans, noted Jane Jarnis, senior attorney at Wolters Kluwer, who pointed out that even if a loan is under the $50,000 threshold established by NCUA Part 723, that doesn't mean it's not a business loan requiring much of the same rigorous documentation and monitoring.
3) Don't fail to cross educate/train front-line employees. "One of the things we've seen is a credit union starts offering member business loans, but when a prospective business member comes in and talks with a member service rep, the MSR says, 'we don't do commercial loans,'" related Pogatschnik. "In fact, we had one credit union that had actually closed a business loan, and when the business member came in to make a payment, the MSR tried to turn him away. You need to have your business staff talk with your MSRs and make sure everyone knows what's on offer, knows the lingo."
4) Don't just know the member, know their business. "Yes, you should know the member, but you also need to know your member's industry," said Cole. "Take a loan for a nursing home, for example. There are a lot of very industry-specific things that you would need to know, insurance requirements, changes to Medicare, etc." To get this type of information, credit unions can turn to the Risk Management Association and the Internet, he suggested, as well as to each other. "Credit unions are good about sharing information with each other, so if you come upon a business that you don't know much about, you might see if another credit union has made similar loans to that type of business." Pogatschnik said this is also why it's important to have an idea of the type of business loans you plan to make when you are hiring. "That way when you are interviewing, you can ask the right questions to make sure the person you hire understands the types of loans the credit union intends to do."
5) Don't fail to recognize that in some cases, the smaller the loan, the bigger the risk. "Small business loans are probably the most difficult and have the highest risk," said Grace Mayo, CEO of Telesis CU and chairwoman of its member business lending CUSO, CU Business Partners. "There's a high percentage of small businesses that fail after five years, and it's easy for them to just walk away. You need to get as much hard collateral as you can, and anything that you can't move away with." Telesis, for example, doesn't make loans to start-ups unless the loan is backed by the Small Business Administration. "Again this is why the documentation is so important," added Jarnis. "It allows you to spell out that the credit union can and will inspect the place of business and collateral."
6) Don't underestimate the technology required. "Credit unions frequently underestimate the resources-both people and systems-required to process and monitor business loans properly," Mayo advised. Cole agreed, adding, "It's important to ensure the adequacy of your systems, and it is often a challenge for some computer systems to deliver what you need. Contact your host to make sure they're prepared to deal with member business loans from origination, documentation, servicing, the entire cycle." Integration of systems is also key.
7) Don't make your deals too good. Credit unions tend to be squeamish about charging fees or pricing something up, but business members are not the same as individual members, and CUs cannot afford to forget that, several experts counseled. "You can't lose your courage when you have to look your business member in the face and say, 'yes, we can do that for you, and that's going to cost you $25 a month,'" Cole offered. "A member business is not just a member. It is a business, with a lot more economic influences acting on it than you see with just one individual. Businesses are accustomed to paying fees for business products and services." And because there tends to be higher risk associated with business lending, pricing appropriately ensures you don't disadvantage your other members, he added.
8) Don't create a soft target for fraud. Both Cole and Mayo pointed out that there is a risk for fraud both in business lending and business deposits. "Credit unions are still relatively new at [business services], and just as is the case whenever we are new to something, there are some people out there who understand that we are new and see us a soft target," Mayo observed. This is why some of the points already made, such as documentation and ongoing monitoring, as well as garnering strong collateral, are so important, Jarnis added.
9) Don't forget a marketing plan. Both Halperin and Pogatschnik said it's not uncommon for a credit union to start offering MBLs but then "forget" to market it to the membership. "Think of the effort that each credit union makes to promote its consumer products. The same energy and money should go into marketing and advertising to the business members," Halperin offered. "Keep in mind businesses carry larger balances, use more services, pay more in fees and offer the CU a greater access to its employee base. Budget for continued advertising and marketing for the complete business services approach."
10) Don't limit your offers to just business loans. All of the experts told Credit Union Journal it is extremely important to offer a full package of business services, not just lending, including cash management.
Perhaps the biggest mistake of all, however, would be to shy away from the lucrative opportunities of member business lending and services. Not ready to dive in headfirst? Consider getting involved in a participation program, Cole advised. Want to jump in but not ready to create an entire business services staff? The experts suggested looking at outsourcing with a CUSO or other vendor offering these types of services.
