FITCHBURG, Mass.-With no history and cash flow to measure, new businesses make for difficult lending decisions. But one CU says its policies significantly reduce the risk of lending to a start-up.
"You are just dealing with a business plan and a member," said Robert Gallo, VP of business development for the $800-million Workers' CU, who emphasized the importance of carefully following a proven lending process.
In addition to leveraging its SBA program and the government guarantees behind those loans, Gallo said Workers Credit Union reduces its risk through a number of steps. First, it looks to make loans for start-ups to members who have been with the credit union for some time, are in good standing, and manage their personal finances well. "We look to see if they live within their means."
Outside of reviewing the start-up's business plan, which Workers' digs into to make sure it is sound, many of the decisions remain a "gut call." But they are educated calls from staff who have extensive business lending experience, including Gallo, who came over to WCU four years ago after 25 years in commercial lending.
"When I sit down with a business loan prospect I have a pretty good feel after the first meeting whether the deal will happen or not," Gallo said. "Of course we do the credit background check, but our decisions are based mostly off the questions we ask. We get a feel as to whether someone, and their plans, are bankable."
WCU's due diligence includes assessing how well the loan applicant is prepared to enter a new market and run a business, and if they have the right mindset. "That is one thing we look for that is very important," said Gallo. "If we get a sense that the person thinks they will start their business, it will be easy, and they will work less than 40 hours a week and make money, we won't touch that loan. The members who realize it will take a lot of work, sometimes 80 hours a week, and that they may just make ends meet at first are the ones we feel make good loan candidates."
CEO Douglas Petersen said business loan prospects also need to share that they possess a strong understanding of their market and have the necessary expertise. "They need to show they understand who their customer is, where they will get their customers from, and what their actual expertise in that area is. Just having the notion to get into a business area is not nearly enough. They need to show they, themselves, bring value to the table."
A Family Affair
If applicants show they have support in the family, especially expertise in the business area they are getting into, that is a plus, Petersen said.
"For example, we are dealing now with a person whose father has an excellent financial background and a daughter who has worked for many years in the industry the new business is targeting. That gives this new business some additional flexibility and stability."
