5 Mistakes Credit Unions Make in Business Services
With 34 years of experience in the credit union and commercial banking industries, Larry Middleman has seen what works and what doesn’t in the business services and lending spaces.
Middleman is founder of and president/CEO of CU Business Group LLC, a Portland, Ore.-based CUSO that provides commercial and business lending and deposit services to more than 400 credit unions in 45 states.
He recently shared the five biggest mistakes that credit unions make when it comes to their business service and lending programs.
1. Not capturing the full business relationship.
“This is an area where credit unions are not really good at,” Middleman said. “Credit unions do well with mom and pop businesses. They may have a lot of lending needs. Some grow into bigger businesses and some don’t. They might just need a business checking account.”
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There are several characteristics that small businesses have that may make building a business deposit suite appealing to credit unions, Middleman said. Businesses with 30 to 50 employees that have balances in the six figures and process a lot of transactions are ideal to court.
A few years ago, deposit services were a sorry state of affairs within the industry, he recalled. Now, as businesses want more, not offering such services as remote deposit capture can mean losing out to the competition.
Read more: Expertise ...
2. Not having the right resources and expertise in business deposit services.
“Credit unions are trying to get there but where they fall off is not allocating the right level of expertise,” Middleman said. “What often happens is (a credit union) will have a good person but then they’re moved over to run the business deposit side. It’s not easy to build up the right expertise to compete with big banks and community banks. If you’re not credible or knowledgeable, you’re not going to get a shot at the (business) relationship.”
Having the right expertise is in line with having an edge over the completion. Middleman encouraged credit unions to accept the mission of becoming a primary financial institution – from risk management to profitability from fee income to having a full package of services.
Read more: Annual reviews ...
3. Not completing annual business lending/service program reviews in a timely manner.
“When the examiner comes in and asks ‘what are you doing for risk management,’ you can get in over your head. Annual reviews need to be an important priority,” Middleman said. “They allow you to find out about business performance before problems happen.”
Middleman said over the last few years, examiners have focused on risk monitoring and if a business lending or service program doesn’t complete an annual review each year, it will send red flags.
Some of the questions credit unions should ask after the business loan is closed is cash flow from the business still adequate to cover the debt and does that business’s loan file contain current financial statements, tax returns and other necessary documents, he suggested. Credit unions should be able to defend their loan decisions with confidence to examiners.
Read more: Strategy ...
4. Not putting together a clear strategic plan.
“With senior management, if you put all the keys to the cars in the hands of the commercial lending officer just hired, bias may come through. It may take the credit union in a less than desirable direction,” Middleman said. “The plan should be written by senior management and reviewed and adopted by the board. It should have realistic growth projections.”
A strong business program identifies goals and niches and then extends out to lending and deposits that is customized to the needs and direction that credit union wants to move in, Middleman noted.
Read more: Due diligence ...
“Examiners are hammering on this. Going on the cheap is another pet peeve. Make sure you do proper due diligence on the lead lender,” Middleman said. “Look at the MBL staff, expertise, policies, level of depth and the type of loans you’re buying from them. What happens if the key person leaves? Is there a good backup?
Middleman said credit unions can manage their member business loans with loan participations and increase asset yields and liquidity. However, quality control is critical for areas such as participation accounting standards, investor reporting and funds management, and staying on top of participation agreements.