Barriers to Offering C&I Loans

Small C&I lending can be risky if not managed properly. Here are a few of the challenges that credit unions often face in implementing a successful small business lending program:

Complex borrower needs: Small businesses have diverse and dynamic financing needs requiring customized loan structures and active monitoring. C&I loans are typically more complex than a straightforward CRE loan tied to a property or a small business loan secured by equipment or vehicles.
Collateral and risk assessment: C&I loans are typically collateralized by working assets, which can be harder to value. In addition, the value of these assets often fluctuates widely due to seasonality and variability in business operation cycles.
Credit expertise and underwriting: Because of their complex structures, underwriting C&I loans requires a detailed analysis of business financials, cash flow, industry-specific risks and management experience. It’s also important to understand seasonality factors and the unique business cycles of the borrower’s industry. Credit unions new to business lending may lack the expertise or specialized staff to perform this level of analysis effectively.
Monitoring and management: Some C&I loans, especially those that utilize A/R or working assets as collateral, require a higher level of ongoing monitoring than the annual reviews typically required for CRE loans. Most require monthly or quarterly reviews that include a recalculation of the borrowing base.
Business lending departments must have the back-office capacity and resources to manage this ongoing monitoring requirement, unless they choose to outsource the function to an experienced CUSO like CU Business Group.
Competition from larger lenders: Larger banks and non-bank lenders dominate the C&I space due to their ability to offer larger credit lines, specialized financial products like cash management or trade finance services, and faster decisions supported by digitally enabled underwriting. Small lenders like credit unions struggle to compete due to fewer resources, lack of scale and limited product offerings.
Regulatory pressures: C&I loans are subject to stricter regulatory scrutiny than CRE and small equipment loans because of their inherent risk and the difficulty of accurately valuing non-tangible collateral. Because credit unions are limited to how much of their lending can be allocated to the commercial portfolio, they often prioritize real estate loans because they are less resource intensive.
Lack of technology support: Credit unions by and large have designed their commercial lending programs for the purpose of underwriting large, complex CRE loans. They try to force C&I lending into this structure, even though small business loans are closer in profile to consumer loans. The result is an overcomplicated, inefficient underwriting and decisioning process that is a drag on resources and diminishes the member experience. Credit unions should leverage today’s streamlined technology to handle these simple loan requests efficiently and expeditiously, reducing the impact on staff and providing the member with a smoother and more streamlined experience.

Capitalizing on the Business Lending Opportunity

Credit unions can succeed in small business lending, but it takes the right systems and tools to do it well. It also requires a change in mindset.

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Capitalizing on Credit Unions’ Small Business Lending Opportunity

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