When Jean Faenza, executive vice president for Telesis Community CU, asked a group of attendees at the CUNA Operations Council's meeting here how many of their credit unions currently offer business services to their members, approximately one-eighth raised their hands. But when she asked how many intend to offer business services in 2004, nearly 100% responded affirmatively.
The reason has much to do with the market that's available and the demand for business services from members. Faenza noted that the top 20 banks control 63% of business deposit relationships and 55% of loans. Where the most attractive opportunities lie, she said, are with "micro" and "small" businesses, defined as operations with annual revenue of less than $1 million or less than $10 million, respectively.
"A new study by the California Credit Union League estimates credit unions can capture 5% of the market, and I think that's conservative," she declared. "The current market share by credit unions is less than 1%. Sixteen percent of companies surveyed said they would move their accounts to a credit union if they were offered similar services, and an additional 11% said they would switch to a credit union if it had the same products but better service."
"And one thing we have locked up is a reputation for offering great service," she added.
Where To Find Help
Because credit unions traditionally have not made member business loans, they might have to look outside the credit union to hire business lending expertise, according to Faenza, whose Chatsworth, Calif.-based credit union has an extensive business lending and MBL participation program. In addition to training the staff, management should start by creating a business plan that targets the small and micro business market in the credit union's area, she said.
In addition, management must check the CU's bylaws and make an amendment, if necessary, to allow loans to be made both to natural persons and to member businesses.
Most importantly, Faenza advised, management must understand the business-lending universe is different from what they are used to.
"These are 'living' accounts. They are not like a checking account that a member might open but then never use," she said. "The credit union will be a partner in the business. Members will continue to need the credit union as time goes forward. They will need personal attention and more affordable rates. They will need specialized products, such as business online banking and free online bill pay capability."
According to Faenza, whose CU has been doing member business lending since 1992, the extra effort is worth it. If a credit union successfully handles business services for a member, it gains the opportunity to land a greater percentage of his or her personal accounts.
"Remember, every business owner is a consumer who has other accounts. Remember also that 6.1-million small businesses are employers. We're greedy-we want all of those accounts."
Credit unions serve 250,000 to 300,000 select employee groups, Faenza said. That figure includes 150,000 to 200,000 small businesses, which she said are a good place for credit unions to make their entrance into the business-lending realm.
'Too Small To Bother With'
"Many of these businesses are too small for banks to bother with. Credit unions are hoping these small businesses grow, and they are partners in that endeavor," she said.
The positives of member business lending include an increased number of loans, a diversified loan portfolio and increased yields, asserted Faenza. Credit unions benefit by meeting the needs of existing members, attracting new members and expanding their image in the community.
"Credit unions develop a primary financial institution relationship," she said.
Avoiding Pitfalls
After 11 years of offering member business lending, 42% of Telesis' loan portfolio is in MBLs. Faenza said her CU has had no delinquencies or foreclosures in the MBL program, which she attributed to never wavering from its underwriting philosophy.
"Our objectives are to limit risk, protect the assets of the member, and make well-informed decisions based on analyzed data and standardized guidelines. We make no exceptions in business lending, although members ask all the time."
Telesis does a lot of homework before making a business loan, she said. For example, if the loan involves property, the CU requires an environmental study to ensure there are no issues with hazardous wastes or chemicals at the site-and the borrower pays the fee for the study.
Another example: if the borrower is seeking a commercial real estate loan to purchase retail property, such as a strip mall, Telesis does not approve the deal unless the mall has a major anchor that will bring in traffic.
"If the loan is for purchase of an office building, we analyze the rent rolls. If it is a five-year loan, we want to know how many of the tenants' leases will expire during the term of the loan," she said. "Another important question is, does the rent collected pay the expenses of the building? The property must generate enough revenue to pay for itself."
Other property types in Telesis' MBL portfolio include industrial buildings, apartment units, assisted living homes and self- storage facilities.
"The rule in real estate is location, location, location. In business, it is management, management, management," said Faenza. "Make sure the people who own the business know what they are doing and are experienced in that sector. If someone is a dentist, and he wants to open a store or a restaurant, we probably won't make that loan."
'A Passion In Their Eyes'
"But, if the person has passion in their eyes, that is a good sign," she continued. "If they say, 'I've been working for other people for years, I'm sick of making other people rich and I'm ready to go out and start my own business,' then I get the feeling they know what they are talking about."
Is offering member business lending worth it? For Faenza, the answer is an emphatic "absolutely."
"There is nothing better than a member coming up to me and saying, 'You changed my life,'" she said.
