Industry experts share recommendations for growing member business lending and loyalty.
Credit unions in the business of serving business members are pretty common today, led by sophisticated operations “that have been at it for a while and have the scale to go toe to toe with commercial banks for $35 million loans,” says Brian Mielke of Servion Commercial Loan Resources.
At the other end of the spectrum, some financial cooperatives are just beginning to take advantage of business lending as “a fantastic way to diversify beyond consumer loans,” says Mielke, VP/national sales director with the New Brighton, Minnesota, CUSO. “Commercial loans tend to be longer term and higher yield than consumer loans. If the rate on a business loan is 5% and car loans are going at 3%, and the credit union’s cost of funds is 2.5%, the spread is much better.”
Another difference in the risk profiles of consumer auto loans and business loans is that a solid business lending portfolio with a core of commercial real estate is secured with property that typically appreciates in value, in contrast to the steady depreciation of car loan collateral, he notes.
As credit unions look to grow their business lending capabilities to take advantage of those opportunities, industry experts offer these recommendations:
1. Look beyond commercial real estate loans. CRE lending is familiar territory for credit unions and can deliver “great balances out of the gate when launching a business lending program, but it doesn’t really address the needs of the base membership,” says Joel Pruis, senior director with CUES Supplier member and strategic partner Cornerstone Advisors, Scottsdale, Arizona. “Most business members are likely running a type of operating business and using consumer financial products in some fashion to support it. That misses the mark for business lending that meets the needs of members.”
More credit unions are looking to move beyond on their reliance on CRE lending, which accounts for most of the $78 billion in the industry’s current combined business loan portfolio, by developing their expertise to provide financing for business operations through commercial and industrial loans, says Jim Devine, founder, chair and CEO of Hipereon Inc., Kirkland, Washington.
“C&I loans are technically more complex credits to underwrite because they have more moving parts in the business model structure that need to be assessed to determine cash flow and link it to capacity to repay,” Devine explains. While these loans pose more risks, they also provide the financing that many businesses within credit union’s existing membership need to grow and employ more people.
2. Build business lending expertise internally. Hiring experienced commercial lenders from banks has been a common strategy for credit unions launching this product line, but in the current tight employment market, “many of the people who are available from a bench perspective aren’t the best players you want to draft,” Devine suggests.
In fact, recruiters are now calling Devine, who serves as faculty for the CUES School of Business Lending™, to ask if he’d share lists of credit union staff attending the school. (The answer is no.)
3. Find your sweet spot. As in many markets, big national and regional banks dominate business services across the state of Oregon, but SELCO Community Credit Union is carving out a niche through high-profile community involvement, a lean credit approval process and a willingness to work with small business borrowers, says Mike Donaca, VP/commercial and business banking for the $1.7 billion credit union.
“Instead of yes or no if an application fits in the box, we’ll look at ways to make the loan, with additional collateral or government guarantees, for instance,” he notes. And for loans already on the books, “when businesses hit rough spots, as they invariably do, the banks will cut and run. But we will work with businesses for years if the borrower is engaged and working hard to do the best they can.”
“What we tell the members we can do, we actually do,” agrees Craig Carpenter, SVP/lending and business solutions at SELCO Community CU. “That leads to great loyalty. We have some businesses that have worked with our credit union from the beginning.”
A strong differentiator for credit unions positioning themselves in the commercial loan market is their personal approach, Mielke says. “They’re willing to take the time to get to know their members and their business needs. Maybe they’ll go out and drive by the property the member wants to use as collateral. They’re willing to roll up their sleeves and get to know the needs of their members,” which supports both member service and risk management.
Credit unions may not be able to match the rates offered by large commercial lenders, “but the box of requirements to qualify for those rates can be very restrictive,” he adds. “Credit unions are more willing to take the time to work with smaller businesses” and provide guidance on how to qualify for the financing their operations need to grow.
4. Identify true market opportunities. Credit unions just launching business lending may find great potential within their current membership. As they reach out to new business members, Pruis suggests that credit unions focus first on businesses with lending needs in the $100,000 to $250,000 range, where they can compete on both rate and service delivery.
Big banks and fintech competitors have online engines in place to make quick automated decisions on smaller loan requests from creditworthy businesses, he notes. “Kabbage, OnDeck and Lending Club say they’ll go up to $250,000 and even $500,000 for business loans, but there’s a lot more friction and back-and-forth in that range—and much higher rates and fees. The lowest implied rate, factoring in recurring fees, is around 10%.”
In analyzing market potential, some lenders may rely on surveys, “but I tell credit union leaders that most of their business members are located around each of their branches,” says Mike Mucilli, SVP of CU Business Group, a CUSO based in Portland, Oregon. “By asking their branch managers and member service staff what kinds of questions they’ve been hearing from members who own their own businesses, they can gather useful feedback.”
5. Partner up to extend your reach. Each credit union must identify its own policies on the types and size of business loans it will make, guided by regulations and recommendations from its own experienced business lenders or business partners in offering this product line. For loan requests that exceed policy limits, selling loan participations allows the credit union to remain the “face” of the lender with members while booking only the portion of that loan that meets its risk tolerance, Mucilli suggests.
Business lending CUSOs and other business partners also offer opportunities for credit unions to supplement their business staffing and services. As just one example, CU Business Group’s small loan program, Fast Track, uses an online portal to provide a faster and more cost-effective way to process investment property loans up to $150,000 and equipment loans up to $100,000. The loans are still underwritten and analyzed by an experienced underwriter, but the application process is more uniform, which facilitates a more efficient decision process, Mucilli explains.
6. Practice vigilance. Among the expertise business lenders must develop is the ability to monitor business and loan performance over the long term. “Many credit unions still invest too little time and money into the monitoring component of the loan portfolio after closing,” cautions Servion’s Chief Credit Officer Tony Lillie. “Having an experienced and knowledgeable team to monitor and complete periodic loan reviews on each loan in the portfolio is necessary for a successful commercial lending division.”
7. Consider technology assists as volume grows. As credit unions expand their business lending operations, they may benefit by reinvesting some of that revenue into automated systems to support back-end processing and annual reviews of business and loan performance. Loan origination platforms such as nCino, Baker Hill, Newgen and Abrigo include workflow management and portfolio management components, Pruis notes.
In working with credit unions on developing their business lending capabilities, “Cornerstone promotes the notion of a behavioral analysis to monitor repayment of small business loans—monitoring transactions, balances and business activities to identify abnormal behavior,” he says. “The goal is to identify when something’s not going well or something’s going really well with business members, so the credit union can step in with counseling to counter negative behaviors or to provide support and additional services for a growing business.”
8. Get off the fence. Some credit unions have been circling around discussions on launching business services for years, only to set those plans aside to focus on issues with indirect lending or other existing product lines, Pruis notes.
“Those strategic conversations on deploying an MBS program tend to keep getting delayed, and it’s unfortunate to see credit unions missing out on an opportunity where they could really do well and provide some strong benefits to their existing member base,” he says.
Many credit unions that do commit build their commercial lending capabilities through a “crawl-walk-run” sequence, Mielke says. “That’s what we recommend when credit unions ask us to coach them through building a business lending program from scratch.”
Carpenter’s advice for credit unions just getting started with business services is to “aim for slow and steady growth, and make sure you do it right. And just as importantly, hire the right people. Don’t shortchange yourself, especially when it comes to the people who will be leading your department.”
9. Make an organizational commitment to business lending. A successful program begins with a plan that has the support of the credit union’s executive team and board, Lillie says. Many credit unions begin by tailoring a program to meet the needs of their existing members but over time come to recognize the potential to grow membership through the business services division.
Marty Eldred, business loan manager for $522 million Sidney Federal Credit Union, Sidney, New York, says support from the top facilitates a big-picture view of the strategic importance of business services. Under the leadership of CEO Jim Reynolds, who joined the credit union in early 2019, organizational growth strategies have expanded to include business services, she notes.
“The leadership and board need to commit to and be willing to invest in business services,” she says. “If you just focus on the lending side, you’re missing a big part of the equation for success. Look at business members’ needs holistically from both the deposit and lending side.”
A strategic focus on business services can help credit unions shift from a reactive mode of waiting for business owners to ask for services to proactively seek out their business, Devine says.
Credit unions serve 120 million Americans, about a third of the population, but hold only about 7% of the assets managed by all U.S. financial institutions. Building relationships with the business owners already in their fold, about 5 to 15% of many fields of membership, holds the greatest promise to bridge that gap, he contends.
“Business members don’t want to have to manage multiple relationships with several financial services providers. That’s a tough proposition. They’re busy people, and their time is precious,” Devine says. “Find them and engage them in a process improvement dialogue so you provide them with the support and services they need to build a measurably more valuable business and become more bankable. By enabling that progression, you can become their provider of choice—and grow together.” cues icon
Karen Bankston is a long-time contributor to Credit Union Management and writes about membership growth, operations, technology and marketing. She is the proprietor of Precision Prose, Eugene, Oregon.