With Small Business Loan Applications Stacking Up, What Should Your CU Do?

The number of businesses that have started in the past two years is historically significant. According to the U.S. Census Bureau, nearly 5.4 million new business applications were filed in 2021, the highest number on record. The pandemic triggered the Great Resignation, signaling a mass departure from the traditional 9-to-5 jobs in favor of entrepreneurial ventures that deliver more fulfillment. This phenomenon, coupled with the Paycheck Protection Program (PPP), has led to a sharp increase in small business loan applications. This trend is expected to continue in 2022 and beyond, as inflation will likely push more local businesses into applying for loans.

There are three critical categories to consider when updating strategies to manage the demand in small business loan applications: Member experience, the credit union difference and balance.

Member Experience

Consumer expectations have shifted since the pandemic; small businesses are expecting digital banking experiences similar to their personal experiences on Amazon. Fintechs have applied this standard to lending, making it quick and easy to borrow money. To avoid being left behind, credit unions need to change the way they lend money; they must be more efficient in taking on applications, analyzing data, underwriting and decisioning.

Modern technologies streamline the lending process and offer unparalleled member experience and support, closing the gap between legacy processes and consumer-driven fintech strategies. A complete and flexible solution for loan origination, analysis, underwriting, review and management will increase efficiencies, reduce costs and improve communication between internal departments. This approach allows credit unions to spend more time with their members and focus on developing and nurturing those relationships, rather than completing manual-intensive tasks. Furthermore, the automated analytics tools will likely unveil data that could have never been revealed through manual processes, driving new points of interaction between bankers and borrowers. This level of support will ultimately increase member retention rates and attract prospects. Plus, having a system that can manage both small business and consumer lending will trigger additional opportunities for cross sales.

The Credit Union Difference

The additional level of insight and time allocated for members will also enable credit unions to become trusted advisors that small business owners can rely on, not only during the funding stage, but throughout the lifecycle of their businesses. Credit unions have a fiscal responsibility to be good partners to their members. This also means guiding entrepreneurs that may not have the experience that the lender does, improving their financial education and ultimately the long-term financial health and success of the business. The trusted advisor status is one that fintechs will never be able to achieve. Fintechs tend to deliver one digital solution very well, but to succeed, an entrepreneur needs an entire breath of financial services, expertise and mentorship that credit unions are known for.

Balance

It is also important that loan diversification stays top of mind for any credit union, especially with the rate of change we are seeing in the economy. Having a diversified loan portfolio allows credit unions to enhance asset quality, resilience and performance, while minimizing risks. Most financial institutions have a diverse investment portfolio but turn an eye when it comes to their loan portfolios, which are the bulk of their assets and the biggest source of risk. They tend to take whatever loans they can get, leading to concentrations based on geography, industry, asset size and business type. To avoid concentrations of small business loans, credit unions should use platforms for loan trading, selling and participation offered by technology vendors, which allow them to exchange opportunities. These open and flexible solutions can help credit unions increase liquidity and manage their loan portfolios more strategically in the long-term. They also eliminate the costs of working with a broker and provide unbiased access to opportunities around the country.

Credit unions’ instinct might be to take on as many small business loan applications as needed to support their membership and community and round out a deposit-heavy banking climate. However, diversifying the loan portfolio will offset risks and deliver a healthy, stable asset stream.

Competing with the fast and user-friendly funding options offered by fintechs, credit unions also need to upgrade their technology stack and refocus their attention on delivering the personalized member experience they are known for. And, when done wisely, this approach will develop and nurture long-term relationships that secure and grow the future of credit unions as primary financial institutions.

Gary Lewis is the Managing Director, Lending and Deposit Solutions for Jack Henry & Associates in Monett, Mo.