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Credit unions around the country are beginning to gear up their member business services. The first loan applications are starting to flow in, and there appears to be lots of enthusiasm for credit relationship, in some cases, maybe too much. Everyone has read about the prospects for larger average deposit balances and larger average loan sizes. In addition, we know businesses can use a wide array of additional financial services so the cross-selling opportunities could prove to be very significant. Most of the large national and regional banks have gone to a centralized loan center model for their small business credit delivery. By standardizing products and incorporating automation tools in their underwriting efforts, they have been able to make quick and cost effective credit decisions. So, what does the typical small business owner think about this centralized approach to lending? In most bank industry surveys, small business customers say: * They like the speed of response they are getting from banks on their credit requests * They dislike the fact this centralized model has hurt or eliminated their personal relationship with the bank At the end of the day, business owners want access to credit. But even more, they want to deal with someone who understands business and better yet, their business. They would like to get some advice that would result in enhanced operating performance for their business. That brings us back to the credit union business model. There is a real window of opportunity for credit unions to step up and provide real service to the small business market. Since the basic credo of the credit union industry is to provide outstanding service to its members, credit unions should have an initial leg up as they compete for small business customers with commercial banks. Here are the key questions that must be answered: 1. What will make small business owners decide to utilize a credit union instead of a bank for their financial services needs? 2. What will make their credit union experience better and what will induce them to buy additional products and services? Building a strong long-term relationship with small business members will start by providing reasonable access to business credit. What is your plan for providing access to credit for this new member base? Their initial assumption will be the person they are meeting with is an expert on small business loans. They will assume their contact person understands how to structure business loan requests. They will also assume that he/she intimately understands their credit union’s lending polices and procedures. Does your staff have previous small business lending experience? Have they been adequately trained? Can they walk this talk? Speaking of policies and procedures, what have you decided to do about your business credit underwriting policies? NCUA regulations will require you review historical financial statements and tax returns from the prospective borrower as well as current personal financial statements and tax returns from the principals. As you review this financial information, make sure your focus is soundly based on a credit provider’s point of view. Given all the available credit opportunities, the tendency might be to let enthusiasm prevail over practicality. Don’t let enthusiasm associated with this opportunity put your credit union into a ready, fire, aim mode. Be properly prepared and remember the old lending adage, “The harder I work, the luckier I get!” At the end of the day, good credit policy is all about managing risk from a lender’s perspective. You are in the lending business. To assess the ability to get repaid, you have to thoroughly understand the operating cash flow characteristics of your prospective borrower. You are taking a calculated financial risk for a defined rate of return. Your return will only be “Prime plus 2%” regardless of how well the business performs. Don’t take ownership risk for a loanership return! Your job is to assess the risk associated with getting your principal plus interest paid back without taking ownership risk in the process. A critical part of your job is to properly structure the loan request. The loan structure should be designed based on the borrower’s cash flow capacity to pay you back. The repayment terms must be cash flow affordable to the borrower. Never forget this core policy, “If the cash don’t flow, the loan don’t go!” You must also have the ability to communicate effectively with your small business members. Remember, the typical small business owner does not have an MBA or CPA designation after their name. Don’t complicate your communication ties to them with technical financial terms that confuse or intimidate them. The objective is to know they clearly understand what you are saying. Be practical and use a common sense dialog to develop your contact relationships. A logical extension of this communication linkage involves education. Plan to provide your small business members with access to good financial management training. The better they are prepared to understand their own fiscal condition, the better credit risks they will prove to be for your credit union. If you plan to use your branch managers and assistant managers as part of the relationship management process, make sure you provide them with adequate training to handle this additional responsibility. The better prepared they are, the more effective your overall relationship management and cross-selling efforts will be. Don’t get enamored with the value of collateral. Collateral is, and always will be a secondary source of repayment. Building materials inventory will not fit into your vault. A piece of commercial real estate won’t either. Don’t over emphasize the collateral value of real estate. All you need to do is to look back at what happened to the S&L’s in the early 90′s when they became fixated on real estate collateral. The real financial leverage in the small business market will come from depth in relationships. As the banks have discovered, the key to stability and long-term profitability is having multiple products and services relationships in place. To get to this enviable position takes nothing short of a dedicated hands-on approach to this market. Roll up your sleeves and go to work with your business members. Show them you are committed. It all begins with providing reasonable access to credit. Unfortunately there is no magic formula for approaching the credit business. It is hard work that requires a thorough diagnostic assessment. Many of you may decide to use an outsourced underwriting support service to supplement your analytical efforts and reduce some of your initial staff costs. If you go this route, make sure your service provider has the ability to quickly and efficiently spread financial statements and provide a well-structured fundamental financial analysis. Realize they can’t do a thorough and timely job for you unless they receive all of the required information. It is your job to gather the necessary data and manage all of the direct contact activities with the prospect. Expect to receive the results of their analysis within 3-5 days of the time they initiate their review. The analysis should address the liquidity, solvency, leverage, profitability and cash flow performance of the prospective borrower. In the normal course of business, does the prospective borrower have the cash flow capacity to pay you back? Don’t assume your outsourced provider will make your credit decisions for you. Their role should be structured to simply support you internal decision-making process. It is still your decision to make. Make sure you keep an eye on the business member’s perspective. They are looking for services that will help them be more successful over time. They want to know you are committed to this end and are deserving of their trust and commitment. Those credit unions that make the organizational commitment to put a sound foundation under their member business credit services efforts will have a significant opportunity to build this market. Stay focused on the fundamentals and don’t look for the quick and easy way. Remember, success in the member business market is an earned right.

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