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Loan Zone: How the Pandemic and PPP Have ‘Turbo-charged’ New Business Lending Strategies

Businesswoman types on laptop displaying financial chart while printing small business loan application form
By Kylee Wooten

4 minutes

SBA program opened the door to small business members, but credit unions should act fast to strengthen these new relationships.

It’s been more than four months since the coronavirus pandemic halted the U.S. economy, closing businesses and offices across the country. Many credit unions that participated in business lending had portfolios heavily focused on commercial real estate lending—today, they are recognizing the need to diversify and expand their business member banking model to reduce CRE concentration risk.

“The pandemic almost turbo-charges the transition that credit unions need to take away from a CRE-only focused model,” Jim Hanson, principal at JDH Consulting, noted on a recent Abrigo webinar, “Crisis Business Membership Strategy in 2020: Adapting Technology and Executing in the New Normal.”

The Small Business Administration’s Paycheck Protection Program, aimed at mitigating the economic impact of the pandemic on small businesses, has been a critical foothold for community financial institutions seeking to obtain and diversify their business lending relationships.

PPP Opens the Door for New Business Lending Relationships

When PPP launched, small business owners scrambled to access the finite program funds, and many were frustrated as they were turned away from big banks due to added stipulations, such as not having an existing credit line or loan with the bank. Credit unions, on the other hand, embraced the opportunity to gain traction with small businesses, reinforcing their commitments to supporting local communities.

The program and the influx of new business also resulted in a significant workload increase for resource-strapped financial institutions. Some credit unions took a proactive, high-tech approach to PPP lending, resulting in greater efficiency and increased loyalty and appreciation from members banking remotely, but the effort can’t stop there.

“We have to have a strategy in place to increase engagement, or the portfolio is going to be a considerable drain on resources over the next couple of years as it sits on our books,” Hanson said in the webinar. From a profitability perspective, the main attraction to issuing PPP loans is the processing fee the SBA issues to the lender. The remainder of unforgiven loans carries a 1% interest rate over the two- or five-year period, Hanson explained. With over 65% of PPP loans in the second round amounting to $50,000 and under, these loans alone won’t be huge money-makers for financial institutions.

If a credit union is an active PPP participant, it should be considering how to engage business members to strengthen these new relationships. And now that credit unions have established themselves as business lenders, this could help lead to further diversification of the business lending portfolio, including targeting more profitable commercial and industrial members. But credit unions should first evaluate existing technology and platforms to determine the solutions needed to adapt and meet the needs of diverse business members efficiently.

Reimagining Branches Post-Pandemic to Support Business Lending

States are beginning to loosen stay-at-home orders and businesses are beginning to open back up, but that doesn’t mean we’ll be going back to normal anytime soon. Credit unions should consider how to target and engage business members effectively post-pandemic.

“Let’s face it: Going forward, our members—both consumers and businesses—are getting more comfortable with alternative channels,” Hanson said. “We’re going to see less traffic in our branches, but this is a time to think about how we can effectively use our branches in order to target small businesses.”

Currently, PPP lenders and borrowers are moving into the forgiveness stage of the program. Hanson recommends using PPP forgiveness to “jump-start” a viable small business program within the branch to help with the forgiveness process. With the extended 24-week forgiveness deadline, financial institutions have more time to implement such a program. Lenders should proactively reach out to members to offer advice and ensure they understand their PPP forgiveness application. Branches should also have designated subject matter experts prepared to work through forgiveness with borrowers.

Hanson encourages institutions that have leveraged technology to take advantage of PPP to continue that strategy for PPP forgiveness, but to create a highly personal experience when contacting members. “We have to make sure the PPP portfolio is profitable,” Hanson said in the recent webinar, and that requires a strategy centered on developing solid business member relationships. “We have to work on the member experience and build a foundation to grow our small business presence in our communities once this all settles.”

Credit unions could also benefit from providing additional training for members service representatives to make more effective service calls with business members. Hanson recommends partnering member service representatives with relationship managers and lenders for complex member referrals and mentoring.

The COVID-19 crisis has sparked an important wake-up call for credit unions: It’s time to become more involved in business lending. For those credit unions that didn’t actively participate in PPP, it is even more important to put a strategy in place now to establish a small business program. All credit unions should be taking stock of their technology solutions for small loan applications and the underwriting process and considering how they may be able to leverage technology to make those processes more efficient.

Kylee Wooten is media relations manager for Abrigo, Austin, Texas, a software company that offers technology that banks and credit unions use to manage risk and drive growth.

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