Perhaps the biggest change in demands upon credit unions by business owners no longer has to do with what the CU can do for the employees, but what the CU can do for the small-and medium-sized business.
Michael Hales, senior executive vice president and director of member business services for Counter Intelligence Associates, San Juan Capistrano, Calif., told The Credit Union Journal's SEG & Business Development Conference that that an enormous market of small businesses is not just being ignored by banks, it's being pushed away. Hales told the meeting he knows what business owners want, and what bankers don't want credit union managers to know.
He also reviewed for conference attendees a plan for a credit union to launch a member business services culture in just 60 days.
Why bother with small businesses, Hales asked conference attendees? Because, he said, there are 26 million small businesses in the United States, and that number is growing at more than 1,000 per day. More importantly, approximately 10% (260,000) change financial institutions annually, and most change because they feel they are not getting services they want from their banks.
"Banks ignore these small businesses on purpose because it is not profitable for them to serve," said Hales.
While many credit unions initially think of lending when it comes to small businesses, it is checking and deposit account relationships that account for 70% or more of the profitability associated with member business services. Hales said the average balance of a small business checking account is $69,450.
"About 90% of small businesses use checking accounts, 46% need cash management, 64% use credit products, and 22% need MMDA-CD-savings accounts," he said.
The Wonder Years
Businesses change, Hales said, and their needs evolve as they go through four life-cycle stages. The first stage is the start-up phase, which Hales refers to as, "The Wonder Years." The first three years is the critical period, he noted. The typical life of a small business that survives the first six to eight years is 25 years. In this stage, businesses need capital or equity financing and business planning. "They don't have business cards, all they have is an idea," Hales said.
CUs need to look for creative ways to help small businesses in that first stage. Hales suggests going beyond opening a checking account and giving the owners referrals to places that can help them, such as investment corporations or small business development corporations- which often are associated with universities.
"Banks don't take the time to help with referrals, and the business owners will remember where help came from," he said. "You are providing them with an alternative, and, hopefully, establishing a relationship."
Stage two, for small businesses that survive the start-up phase, is a period of high growth, or what Hales termed, "The Blunder Years." In this stage, the business is producing whatever product or service it is supposed to produce. It has suppliers, customers, and is selling, selling, selling, he said. One area of danger during this time frame is the business can sell itself out of business by losing track of other aspects of the operation.
"This business comes to a credit union for a revolving line of credit for working capital, term credit for capital asset expansion, payroll processing, and merchant card relationships," said Hales. "If the credit union establishes the relationship in Stage One, the chances of keeping it for this period are good."
The third stage of the small business life cycle is maturity, or "The Thunder Years," Hales said. At this point, the business is going well. It needs investment management, cash management, trust services and tax planning.
According to Hales, stage four brings either decline or revitalization. His title for this period is, "The Plunder Years." The owner of a stage-four small business might be thinking of getting out after years of 100-hour workweeks, Hales said. This owner needs investment management, estate planning, strategic planning, management succession planning, sale or merger assistance, and business valuation.
"A credit union might manage the wealth of this business owner, or it could arrange the financing of the sale of the business to its employees. All of the relationships credit unions offer represent cross-sell and up-sell opportunities," he said. "But you must understand what a business owner needs so you can educate him or her if necessary."
Which is where, Hales said, his 60-day, 12-step process for launching a member business lending program comes in. To put a program together, he said a credit union does not necessarily have to hire a commercial loan officer. In fact, he wished credit unions good luck if their plans call for hiring a commercial loan officer.
"A few years ago, major banks pulled authority back from the customer contacts, and stopped training. Because of this, the banking industry is having difficulty finding commercial loan officers."
Starting a 12-Step MBL Program
The 12 steps in Hales' member business lending program are: commitment, internal analysis, external analysis, competitive intelligence, product definition, market plan, loan policy, MBL application, loan documents design, underwriting procedures, loan servicing, and training.
The first step, commitment, starts at "day zero" by educating the board of directors on the value of member business services to the CU. Hales said such services are three to five times more profitable. A good place to start is by preparing a business plan for the board.
Step two, internal analysis, begins with research into how many existing members are self-employed.
"Find out what products and services these members are forced to get from others, such as the community banking industry, that they would rather get from you," he said. "Survey them or form member focus groups."
CUs need to do this simply to retain existing money. Hales cited an example of a credit union losing a $300,000 deposit account to a community savings bank simply because it couldn't make a business loan to a member. "The community bank said it would make the loan, and offered a discount rate if the person brought over all of his accounts," he recalled.
The goal is to build portfolio and profitability without increasing infrastructure or spending money, he said
Where To Get Data
For step three, external analysis, CUs should check with the Census Bureau (www.census.gov) to find out how many and what kind of small businesses there are in their market(s). He said the FDIC (www.fdic.gov) offers free information on financial institutions in the area, and the Small Business Administration (www.sba.gov) has data on which competitors are aggressive business lenders.
Another part of external analysis is being aware of your community, economic changes, and local economic drivers. Hales reminded attendees that all CUs are able to write SBA loans, not just those community charters. He recommended starting a CUSO for the purpose of offering member business services.
In step four, competitive intelligence, CUs need to ask themselves who is the competition? Some of the answers are expected, but Hales said some are surprises.
Among the "usual suspects," he said, are small business services from American Express, E-Trade, and Merrill Lynch. However, he said credit unions should be aware of other players, including State Farm Insurance and Costco, which offers to its small business members lines of credit and installment loans, which are offered by the Principal Financial Group.
"There is some invisible competition from online companies-which are brokers who sell the loans to large banks," he said. "Look at the loan, deposit, investment and fee-based products that the most aggressive small business lenders in your market offer. Look for weaknesses and capitalize on your strengths," he said.
In step five, product definition, CUs ensure they have what members want. Hales said commercial real estate loans, term business loans, short-term notes and lines of credit (or credit cards) are the types of credit facilities that would meet the needs of 90% of small business owners in the target market.
Where You Want To Go
For step six, the marketing plan, CUs need to define market focus. "Determine where do you want to go and how do you want to get there," he said.
In step seven, loan policy, Hales pointed CUs to NCUA's rule 723 for more guidance.
Step eight is to develop a MBL application form. Some are about six pages long. Hales said to make sure it covers everything that is necessary.
The owner of a small business will be asked to guarantee the debt. Supporting statements should include the most recent three years of business financial statements and business tax returns, the individual tax return and a personal financial statement.
Step nine involves the design of loan documents. Hales said CUs can use loan document preparation sources such as Bankers' Systems Inc, Harland Financial Services or Baker-Hill.
Step 10, underwriting procedures, is a variable step. Credit unions can choose to do these in-house or outsource the work. If a CU chooses to do so in-house, it must meet the NCUA's 24-month experience requirement, which is why Hales advises outsourcing the job to a qualified, third party underwriter.
"Outsourcing is less expensive, reduces turnaround time and improves your competitive advantage," he said.
Step 11 is loan servicing and portfolio management. Hales said this step includes periodic financial statement reviews, insurance, and filing and recordation of UCC filing statements and real estate deeds of trust. Then comes payment collection and posting, and interest rate changes. All of these can be done in-house or outsourced, he said.
Step 12 is training. CUs must make sure they develop and continue to develop the skill sets of their employees. "Build and sustain internal expertise," Hales advised.
