Industry experts and credit unions often indicate that a business lending and deposit services program can be a great way for a credit union to better serve members and achieve growth goals.
Based on NCUA 2006 Call Report data, approximately 20% of the nation's credit unions currently offer business loans to their members. As many more credit unions explore the possibility of doing so, they ponder what the right equation is for a successful business lending and deposit services program that helps minimize risks and maximize rewards.
Business Planning and Product Selection
A critical first step in building a new business lending and deposit program, or expanding an existing one, is to develop or strengthen a business plan. An effective plan should include an assessment of the lending and deposit needs of the various businesses within your market, as well as an assessment of the competitive environment.
A business plan should then layout the product and service mix your credit union plans to offer, and the types of businesses it plans to serve. The most popular business lending products offered by credit unions today are commercial real estate
loans, equipment loans, secured lines of credit
and business credit cards.
You can determine what product and services mix is right for your credit union by using what you've learned from your market and competitive assessments, in addition to considering your existing business lending and deposit expertise, systems resources and risk tolerance levels.
The member business lending regulation (Part 723), which provides specific requirements for credit unions' business lending policies, including collateral and security requirements, as well as limitations on the size of a credit union's business lending portfolio, will also play an important role in defining your product and services mix.
Finally, remember the deposit side of your business services program. Developing business-focused deposit products can also increase the profitability of your business services program.
Hiring and Training Staff
Another essential component of the business lending and deposit equation is to hire the right staff with the appropriate level of experience to support the products you plan to offer.
Credit unions continue to have difficulty finding and retaining staff with general commercial lending experience. But having someone on staff with only general experience is not enough. Your commercial lender must have experience in the specific types of loans that your credit union intends to make.
For example, a lender skilled in making equipment loans does not necessarily have the expertise to make commercial real estate loans. Using inexperienced staff to underwrite your business loans can present significant risk to your loan portfolio.
One way that credit unions can supplement their experience is to outsource activities such as underwriting and loan documentation to a credit union service organization.
Hiring experienced staff is essential, but training your front-line staff at every location about the business products you offer is important as well. If front-line staff is not trained, you will negatively impact the ability to grow your business lending and deposit program and run the risk of losing potential opportunities.
Compliance and Ongoing Monitoring
After your credit union has decided to offer business lending and deposit products, it must ensure it has the proper compliance and operational risk management policies and procedures in place.
Because commercial lending is much more complex than consumer lending, the loan documentation process is more challenging as well. The loan documents will include many important contractual provisions governing the ongoing relationship between your credit union and the borrower.
The borrower's ability to repay the loan is dependent on its successful business operations, so it is important that the right borrower covenants be incorporated into the loan agreement. For example, your credit union will want the right to review the borrower's financial records and do on-site inspections of the borrower's collateral.
Documenting commercial lending transactions so your credit union is in compliance with state and federal law can often be difficult to do on your own. It often makes sense to partner with a provider with a proven track record of offering a variety of lending and deposit documentation solutions that can help you meet your existing needs and help you grow in the future.
Your credit union must also have the processes and the personnel in place to monitor the borrower's behavior after the loan has closed to ensure that the loan covenants are met and that the
loan is repaid.
Periodic review of the borrower's financial statements is imperative. It will enable your credit union to determine how well the borrower's business is being managed. The borrower's failure to comply with the financial covenants may be a signal that the borrower is facing financial troubles.
And don't forget, there are a number of other ongoing monitoring responsibilities such as: on-site inspections, making sure that the borrower maintains appropriate insurance coverage, and monitoring and updating UCC filings.
Promotion
Because credit unions have traditionally offered consumer-based products, their members or prospective members may not think of them first when looking for business loans or deposit products. That's why a strong promotional plan is needed to raise member awareness.
Simply putting an advertisement in your newsletter or doing a direct mail campaign is not sufficient. Actively engaging in business development activities, such as attending local Chamber of Commerce meetings, sponsoring local business events, and participating in other community-based activities should be critical components of your promotional plans.
Your front-line staff can be helpful in identifying potential business lending or deposit opportunities, so on-going product training and incentive programs should also be considered as part of your promotional plan
Sufficient planning, plus the right product mix, combined with experienced staff, careful underwriting, effective monitoring, and strong promotional activities, will result in a successful business lending and deposit services program.
To recap, here is a checklist of steps to consider when developing a business lending and deposit services program:
- Conduct market and competitive analysis to determine businesses' product needs and service expectation
- Develop strategies and create a business plan that outlines your objectives and goal
- Define your policies and create business lending and deposit products designed to meet your market needs
- Hire experienced staff to implement your business lending and deposit services program
- Actively promote your business lending and deposit services via a comprehensive promotion plan and business development activities
- Train branch staff to cross-sell your business products and provide incentive plans to help retain qualified staff and grow your program
- Evaluate the processes and tools needed to effectively support your business lending and deposit program and growth objectives.
- Monitor your business loan activity to effectively manage your risk
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