AUSTIN, Texas -
Just ask Steven Wise, president of State National Bank in Fort Worth: "Members are asking for commercial loans," he said, noting that business owners expect to pay a 10% fee on revolving lines of credit, and commercial accounts often produce origination fees.
One of the most important elements of commercial lending is managing risk, he advised.
"A credit union cannot eliminate risk, but it can manage risk," he said. "Whether risk is acceptable or unacceptable depends on the credit union, and is up to the board of directors to determine."
Commercial loans should be structured to manage risk. Wise said if a farmer harvests cotton on August, the loan should be repayable in August, not December. Monitoring also is important. He recommended reviewing loans annually, even if there is a 10-year commitment.
"The credit union can call the loan early if things are getting bad-before all the equity is distributed."
Low Risk Equals A Low Interest Rate
As in the rest of the lending space, low risk equals a low interest rate, and high risk is compensated with a higher rate. Wise said a risk rating system helps price loans, and it can be created in-house on an Excel spreadsheet.
"What is better: a 7% rate? Or 6.5% with a 1% origination fee? Know the answer first, then be in a position to offer or negotiate."
Early in his career, a mentor passed on a pseudo-religious saying to Wise: "Blessed are those who have collateral, for they shall be paid." Wise said the lesson was reinforced shortly thereafter, when he switched to a new job and inherited two bad loans.
"For the first, I called and said, 'You are behind. You need to make a payment, or we'll come get your car.' The second one didn't have any collateral, so I said, 'You are behind. You need to make a payment or...I'll call you again.'
"I had no leverage," he added.
The biggest financial problem with small businesses, Wise said, is cash flow. He said this is due to accounts receivable issues. When analyzing a business' financial statements, he cautioned against reliance on pro-forma statements, as companies rarely hit their target numbers. Wise suggested accepting 25% of projections.
The FICO score of the person running the company is a determining factor, but the CU still must examine cash flow and other considerations, Wise said.
Resume And Interview Important
"A credit score is not as heavily weighted as it is on the consumer side," he explained. "The person's resume and interview are important. Do you get a warm and fuzzy when you talk to the person? It is good if you do, but remember: sometimes good people can't pay. The business must have the capacity to pay back the loan."
The economic environment also is important. Wise said credit unions must be wary of businesses with a concentration in a geographic area or an industry.
"Is it subject to large swings? Each industry has different characteristics to their operating cycles. Some can take a long time to turn accounts receivable into cash. The credit union must understand the members when they come to borrow."
Cash versus accrual accounting also makes a big difference. Wise said farmers never show a profit on a tax return. If they made money during a calendar year, they will go to the feed store on Dec. 31 and pre-pay expenses for the following year, he said.
The most important factor to keep in mind, he said, is the board must determine and communicate its risk aversion to credit union management.
"A credit union will never be good at everything; it must find its niche."
How To Set LTV
AUSTIN, Texas-State National Bank President Steven Wise offered several suggestions for acceptable loan-to-value percentages for different types of collateral:
* Single-family residence, 90%
* Commercial real estate, 80%
* Equipment, 75%
* Multi-family residence, 75% ("This is fairly risky, so the loan-to-value depends on the project and the market," he said)
* Raw land, 65% ("This is the lowest because it is the most risky.")
The one type of collateral he couldn't offer a target percentage for was receivables, suggesting that this entirely depends on the receivables in question.
