By Alan D. Theriault, President, CU Financial Services
Beware of business lending myths - they may keep you from seizing the opportunity to better serve your community and members and cause you to miss out on the rewards of business lending. Also, some myths may cause your business lending program to stumble, or catch you or your board off guard.
Myth #1: "Start small". A successful business lending program requires investment and talent. Originating, processing, and collecting a small or micro-loan can take as much time (or longer) than a loan 10 times larger. The efficiencies generated by an initial focus on larger real estate secured loans helps generate the revenues to pay for future program expansion, and service to smaller borrowers.
Myth #2: "We’ve never had a loss on our business loan portfolio". Some business lending evangelists claim a perfect record making business loans. However, peel back the onion and you find, it’s a matter of the "definition" of loss. A high profile foreclosure that results in extended families losing their homes generates a loss to the institution and community - a loss of members, credibility, and the wages paid to employees to fix the problems. Responsible lenders stay humble and strive for deals that provide benefits to both borrower and lender. A business loan portfolio brings risks that need to be managed.
Myth #3: "We need a new core processing system for business loans". Business loans can be structured to fit your existing system. If you service home equity & unsecured loans, you can service business loans. If your volume is big enough, or you have multiple lenders, you will need a "front end" data base to keep track of collateral, guarantors, vendors, and documents, but this doesn’t have to break the bank.
Myth #4: "Our membership and the community wants this service and we’ll be ‘swamped’ with business". After launching a program, you may be "swamped" with loan requests - most you should deny; even bankers will send you applicants - their turn downs or borrowers in trouble. Solid loans take work and "salesmanship" to generate. Many business owners have doubts that a credit union can make business loans. Program execution needs to be expert in order to build credibility. You are not the only game in town - banks across the country are making $100,000 + unsecured loans in less than 24 hours by using specialized decisioning models.
Myth #5: "NCUA encourages business lending". The rhetoric of NCUA’s Board members takes time to filter down to the novice examiner who can turn your credit union into a CAMEL 4. Most NCUA examiners are new to business lending. Some high profile failures related to business lending are bound to occur - they have in the past. A knee jerk reaction to these failures, negative economic trends, or new NCUA management could spell trouble unless your program is bullet proof. Take the time and invest the money to hire good staff and advisors.
The rewards of business lending are large. High yielding, well secured, long term, adjustable rate business loans can also result in core deposits, which would otherwise be unavailable. A well planned program can also help a credit union transition into a dynamic community institution.