The shifting sands of the consumer lending marketplace havecaused the traditional loans (auto loans, home equity loans, andmortgages) that credit unions know and trust to either become scarce or thinly priced due to competition for each deal. Couplethis with generally increasing costs, like regulatory complianceand provision expense, and credit unions will need to find otherloan products to pursue. Member business lending should be one ofthe first loan product expansions considered.

Member business lending is not without its risks. However, if acredit union is prudent in its approach to this arena and takes thesteps necessary to appropriately manage its costs and mitigate itsrisks, then it will create a win-win experience for both thebusiness member and the organization’s bottom line. If the creditunion falters on either expense control or risk management, themember business lending experience will not be as satisfactory asinitially planned.

First and foremost, investment in the appropriate humanresources is of critical importance. Business lending is muchdifferent than consumer lending. Promoting someone from theconsumer lending function into the business lending functionelongates the learning curve associated with business lending. Thismay also create a bit of a reputation risk for your organization asyour business members may lose patience teaching the fledglingbusiness lender the nuances of business and their borrowingneeds.

From the aspect of compensating your business lending officer,should you decide to include an incentive program as part of theirtotal compensation package, make sure that these incentives arelinked to the member business lending portfolio’s performance overtime. Allow each loan to age for at least 12 months fromorigination before providing an incentive. This not only encouragesquality loan originations but also creates a disincentive for asuccessful business lending officer to leave the organization.

Similarly, remember that slow but steady wins the race. Setrealistic loan volume goals that build the portfolio withoutcreating unwise risk for the organization. Ten $50,000 loans aretypically better than one $500,000 loan from the perspective ofdiversification of risk. Also, think for a moment what would happento the delinquency rate on a small member business lendingportfolio if this $500,000 loan went delinquent. (On a $10 millionportfolio, a delinquency rate of 5% would result and would probablyattract some level of regulatory attention.)

Consideration should also be given to providing Small BusinessAdministration loans to your members. This could be readilyachieved via an outsourcing channel and several companies providethis option. Moreover, if negotiated up front, a few of thesecompanies might allow you to repurchase the portfolio created fromyour referrals at some point in the future (once the memberbusiness lending function has grown to a certain size).

Managing the costs associated with a business lending functionis also critical to the eventual success of the program. For aprogram that is just being initiated, give serious thought tooutsourcing the credit underwriting function as the portfolio isbuilt. In most instances, unless the organization is consistentlyunderwriting 10 business lending requests a month for at least sixmonths, it is less expensive to pay as you go by hiring anoutsourced professional.

From a marketing perspective, costs can be contained throughmarketing to existing relationships. If your credit union isSEG-based, start with these select employee groups as potentialborrowers. If not, use existing e-mail addresses and websitebanners to announce the availability of member business loans andask for referrals. By building from within, not only will the costsbe trimmed, but the likelihood exists that you will have less riskyborrowers apply.

Member business loans are not a set and forget type of product.Updated financial statements must be requested and re-underwrittenon at least an annual basis. Collateral valuations may need to bedone more frequently depending upon the type of loan andcollateral. Be sure to invest in both a system and appropriatelytrained personnel that will allow for the proper and timelymonitoring of the member business lending portfolio.

One final way to mitigate risk within the business lendingportfolio is to engage a qualified third- party loan reviewprofessional to at least sample the portfolio on an annual basis.Not only will the investment in this resource validate that theunderwriting standards required by your loan policy are beingadhered to, but it can also help to highlight both risks andopportunities within the portfolio. Prospectively, the regulatorswill most certainly make this a requirement as the overallportfolio grows.

Through the investment in appropriate staffing and systems andprudent management of costs, a credit union can be very successfulin the member business lending arena. Now is the time tostart. 

Jim Simon is the president of Akcelerant Advisors LLC.
Contact 610-232-0157 [email protected]