A New Opportunity to Address Industry Challenges
Liquidity is an
ongoing challenge for most financial institutions, including credit unions. This
challenge has been further exacerbated by the credit union industry’s obligation
to act in a prudent and financially responsible manner by investing the large
influx of member deposits driven by government stimulus and decreased member
spending during the pandemic.
Credit Union Liquidity Challenges
Credit unions simply do not have an efficient investment vehicle available that matches the short-term nature of member-demand deposit accounts. Consequently, the maturity of the investments made by credit unions does not always coincide with their members’ need for access to funds on deposit. Marked and persistent increases in consumer prices in the wake of the Fed’s approximate 5% cumulative increase over the past sixteen months has further compounded the issue, as more household budgets are stretched and consumer demand for funds on deposit increases.
Resistance to Return to Office – a New Opportunity
Over the past few years, many employees who once worked a traditional five-day week in an office have now acclimated themselves to a work-from-home routine. However, as employers have increased pressure on staff to spend more of their work week in the office, a significant number of employees are pushing back. In fact, in the wake of the initial move away from traditional officing, many continue to transition from customary office-based positions to those that provide the freedom to work from home, including an unprecedented number of entrepreneurial-minded people pursuing the self-sufficiency and independence of business ownership.
According to the US Chamber of Commerce, applications for new businesses in 2020 skyrocketed to 5.4 million new filings during the pandemic and remained strong at 5.1 million in 2021. Clearly, not all applications result in new businesses opening their doors. However, even at the 10% national conversion rate, two million more businesses are in operation today than at the end of 2019.
These new businesses provide a unique opportunity for credit unions looking to increase their liquidity while also supporting small businesses within their field of membership. The potential payoff may require some innovative thinking on the part of credit union leaders and board of directors who are accustomed to more traditional methodologies, but the upside may well be worth the shift in perspective.
What This Means for Your Credit Union
After successfully launching their business, many new entrepreneurs will be looking for working capital to support and grow their ventures. Rather than pursuing the cost-prohibitive option of accounts receivable factoring (borrowing against receivables), the typical path that most business owners follow is to seek a line of credit.
Lenders providing borrowing base lines of credit—lines backed by business assets such as accounts receivable, inventory, equipment, and real estate—routinely require the Borrower to move all of their deposit accounts to the Lender’s institution, including savings and payroll accounts, as well as the demand deposit account that will be used to fund advances or draw requests.
At some point after this initial financing, business owners will typically seek to replace their line of credit with SBA financing, frequently followed by a commercial loan that is often secured by real estate. Credit unions with the foresight to embrace borrowing base lines of credit, SBA loans, and commercial lending secured by real estate will find opportunities to grow their lending, liquidity, and business membership.
In fact, credit unions often work
with members through each stage of their business growth, further solidifying
their relationship.
This strategy may not resolve liquidity issues overnight, but it will afford credit unions an often-untapped path to increased liquidity, revenue streams that are rate competitive, and membership and business growth. As with any business lending strategy, risk can and must be managed through conscientious lending policies and, of equal import, comprehensive and systematic monitoring.
Monitoring Borrowing Base Lines of Credit
Until recently, the management of all aspects of these various lines of credit fell to the Lender. The moving parts are numerous and ongoing: accounts receivable invoices must be added to the line (at some predetermined advance rate), cash receipts must be subtracted from the basis for borrowing, equipment must be added and subtracted, inventories must be updated, and accounts-payable aging must be closely monitored.
This meant Lenders had to manually integrate information from a variety of spreadsheets in an attempt to monitor all of the many components and the fluctuating data associated with these lines of credit. However, a new and groundbreaking technology platform enables Lenders to now automate most, if not all, of these functions.
Breakthrough Technology Solves Monitoring Issues and Helps Mitigate Risk
A new solution, BB-360 by Lendovative Technologies, Inc., has made the management, tracking, and aging of assets that serve as security for borrowing base lines of credit both effective and efficient. The communication and compliance components of the software make this platform especially attractive to credit unions. Not only can the system receive and update accounts receivable and payable, inventory, and equipment listings on a real-time basis (with Level 2 Monitoring), but it can also send reminders to the Borrower when updated reports are needed. All communications between the Lender and Borrower can be stored within the platform, making the monitoring and auditing of these lines and associated credit files extremely efficient. In addition to organizing and managing the data, this technology requires the Borrower to authenticate the veracity of the data in each transmission communicated to the Lender.
New Strategic Partnership
The MBFS CUSO has recently entered into a strategic partnership with Lendovative Technologies, Inc. to bring their BB-360 technology to the credit union space on a national level. MBFS welcomes the opportunity to demonstrate this technology and show your credit union how to better meet the needs of more businesses within your field of membership, while ensuring that risk management and the monitoring of these loans remains at the highest possible level.
To learn more, interested credit unions should contact info@mbfs.org.
About MBFS CUSO
MBFS assists credit unions in
procuring, underwriting, processing, and funding business loans within their
markets, as well as nationwide. The CUSO also provides individualized servicing
options tailored to meet the needs of each of the credit unions it serves.
Headquartered in Bucks County, PA, MBFS’ remote workforce of experienced
lending professionals currently serves over 100 credit unions with a combined
servicing portfolio in excess of $2.5 billion. The CUSO is well positioned to
continue the expansion of its member business lending, participation, and
servicing success. Learn more at www.mbfs.org.
About Author:
Craig Page is Chief Revenue Officer at MBFS CUSO. He is a recognized expert and thought leader throughout the credit union industry and has authored numerous articles for national publications and media outlets. With broad and extensive C-suite experience in administration, operations, and risk management, Craig utilizes his innovative and integrative perspective to increase profitability and build trusted, productive relationships.