As noted in the first part of this series (CU Journal, Sept. 2), America's small business owners and prospective entrepreneurs are often left ignored and neglected by most banks- unless they want to borrow $250,000 or more.
This multi-billion dollar market is literally "up for grabs" and the credit union industry is presented with the opportunity of a lifetime. And make no mistake; even the small business owner who has gone to the Internet for access to capital would rather have his total loan and deposit/investment relationship with one financial services provider in his local community. How can credit unions capitalize on a profound member business services opportunity?
Two CUs - Two Different Methods
Ken Furth is Business Lending Officer at Fairwinds Credit Union, a $800-million community credit union in Orlando, Florida. Ken is a knowledgeable former commercial banker with several years of experience in small business lending. When a member or prospective member approaches Fairwinds for a construction loan, commercial real estate loan, term business loan, short term note, or revolving line of credit, Ken requires a completed application supported by the most recent three years of business financial statements, three years of business income tax returns, three years of personal financial statements of the owner(s) or guarantor(s) and a current personal financial statement from each owner or guarantor. Ken's credit analysis experience has trained him to thoroughly analyze the financial condition of the member business applicant to determine the financial condition and creditworthiness of the business. That analysis, along with a review of the appropriate credit bureau reports, enables Ken to make a sound credit decision.
On the opposite coast, Ana Sims is loan manager at Santa Ana Federal Credit Union, a $62-million institution in Orange County, Calif. Ana, a credit union professional for over 15 years, has never analyzed the financial statements of a small business. But that doesn't deter Ana for a minute. Working with our firm, Santa Ana Federal has joined a growing number of credit unions that outsource small business credit underwriting to a third party underwriter, thus satisfying the "experience" requirements of NCUA Rule 723.
Ana requires the same member business loan application and financial documents as Ken in Orlando, but when she receives a complete set of financial statements and tax returns, she simply forwards them to an established small business credit underwriting company that performs a detailed financial statement and cash flow analysis, then returns a comprehensive evaluation and recommendation to Ana within 2 - 3 business days. Ana and her CEO Steven Potts can then make a safe and sound credit decision within just a few days of receipt of the completed application-far more rapidly than their local community banking competition.
How to Enter The Market
While these two credit unions have found alternative ways to enter the lucrative member business lending market, they are on the leading-edge of a strategic opportunity that, when properly executed, may replace community banks as the lender of choice for many small business owners. Regardless of the underwriting process -internal or outsourced- the opportunities for credit unions of all sizes are significant. Once the board and management have made the commitment to Member Business Lending (MBL), here are the steps to follow:
An Internal & External Market Analysis
What percentage of your existing membership is eligible for a member business loan? A printed or electronic survey of current members, a series of member focus groups, or an MIS report of current "dba," "partnership," "LLC," "PC," or "Inc." account relationships might yield surprising results. For example, Suffolk Federal Credit Union in Long Island estimates that 15% of its 47,800 members are self-employed.
What is the demographic composition of small businesses in your market? What financial institutions maintain offices in your market and which of those institutions are aggressive small business lenders? A combination demographic analysis and competitive survey will identify industry-sector targets and the products and services that are currently available to those businesses.
Member Business Loan Policy
The guidelines found in NCUA Rule 723 provide an excellent blueprint for a comprehensive Member Business Loan Policy. Remember that there are two cardinal sins in small business lending: the first is to not have a business loan policy. The second is to have a business loan policy and not follow it. Therefore, care must be taken to draft a policy that will meet federal or state regulatory requirements, cover the policies and procedures most appropriate to the credit union's lending objectives and internal infrastructure, and at the same time remain flexible enough to provide for exceptions to policy where warranted and deemed appropriate by senior management.
Loans, Deposits, Products & Services
Based on the results of the Internal and External market analysis, basic small business loan and deposit services should be offered. A good place to start which will meet the borrowing needs of the majority of member business loan applicants is to offer (1) a term business loan for equipment purchases, tenant improvements, business expansion or other needs that can be supported by a fully amortized loan ranging in term from one to five years; (2) a short term note for working capital purposes when the need for capital might range from a few days to a few months, and (3) a revolving line of credit to meet periodic or seasonal funding needs. Initial deposit products should include (1) business checking accounts (it is important to note the competitive advantage that allows credit unions to pay interest on business checking while banks still cannot), (2) business savings accounts and (3) business money market accounts. Other fee-based services might be considered, including cash management services, lock box services, business credit cards, merchant services, payroll processing, insurance, management transition and succession planning services.
The MBS Marketing Strategy
If you build it, they might come. If you plan your approach to launching and sustaining your Member Business Culture by identifying your target market, offering the most appropriate products/services to meet market needs, focusing your delivery methods and establishing measurable and meaningful goals and objectives, providing your employees with the tools they need to succeed, and remaining flexible enough to shift your financial services offering strategies to accommodate changes in the market due to external forces, you will succeed where others have not.
As I mentioned above, there is a financial services industry-wide shortage of qualified commercial loan officers. Today's graduate schools are producing medical professionals and computer scientists, not finance and accounting expertise. Banking industry commercial lending development programs are nearly extinct. A large percentage of the pool of lending officers populating large institutions are more familiar with credit scoring, and most are supported by centralized credit analysis facilities and thus do not have the analytical skills or experience required to properly perform a comprehensive cash flow analysis. The result? It will become increasingly difficult to hire good, qualified commercial lending officers to support the industry's member business lending initiative. Those qualified loan officers who might be available will command compensation packages well into six figures. The development and deployment of new, credit union-focused comprehensive training programs for business lenders is imperative.
Outsourcing the credit analysis function to qualified third party providers and paying for comprehensive financial statement analysis and credit evaluation on a per-application basis (the cost of which can generally be passed through to the borrower) is a logical and cost effective alternative to in-house credit processing. Keeping our focus on the long game, however, there is no substitute for well-trained lending officers at all levels of the credit union.
The Focus on SBA
There is one additional step which every credit union executive should all take: Congress must be persuaded to open the doors of the U.S. Small Business Administration to credit unions, regardless of type of charter. While the American Bankers Association is pressing hard to keep credit unions out of the SBA lending market, the fact remains that many bankers continue to ignore the borrowing needs of many small business owners who need access to capital that might willingly and eagerly be provided by credit unions (CU Journal, Sept. 2). Armed with the same loan guarantee opportunities afforded to banks and other business lenders, CUs would be able to play a strong role in enhancing the American economy by addressing the capital needs of its most rapidly growing sector through SBA loans.
Still Not Convinced? Read On.
Small business is the most rapidly growing component of the American economy. It is estimated that more than 1,200 new small businesses are established each day. Not only do credit unions have the potential opportunity to serve the personal financial needs of the member business owner and his or her family, but by becoming providers of financial services to member businesses we have the opportunity to serve the financial services needs of the business and all of its employees and their families. This is, indeed, the opportunity of a lifetime.
Even those credit unions that decide not to aggressively market member business loans should look at this line of business as a defense strategy. Please consider the following example:
Priority One Credit Union in South Pasadena is a $128-million institution led by CEO William Harris. Bill is a firm believer in the importance of Member Business Lending and the need to originate SBA Loans. One reason that Bill is an adamant supporter of member business lending is last month's sudden and surprise loss of a $300,000 deposit relationship to a local community bank that extended an SBA loan to one of Bill's members. Not only could Bill not compete for the loan, the bank required that all of the borrower's deposits held in Bill's credit union be moved to the lending bank as a condition of approval of the loan. Bill is now in the process of having his credit union certified by SBA and is considering entering into an outsource arrangement for credit evaluation and financial statement analysis services.
Whether we look to member business lending as a strategic offensive initiative for growth and profitability, or whether we view member business lending as a passive tool to be used as a defense strategy to protect against member defection, the challenge is the same: make the commitment to arm your credit union with member business lending capabilities and consider the implementation of a member business sales and service culture. More than ever before, member business is good business.
Mike Hales, a "recovering banker," is Director of Member Business Services with Counter Intelligence Associates of San Juan Capistrano, Calif. He can be reached at 800-424-4951 or mike counterintel.com.