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Do’s and Don’ts for Successful Small Business Lending

BY RYAL TAYLOE

As we approach the end of 2015, it is a great time to look back at the ground we have covered. Over the past year in this space, I’ve shared some best practices to help you develop a world-class member business lending program. Topics have included:
• Why credit unions should offer MBL;
• Building a winning MBL team;
• The role of CUSOs in successful MBL programs;
• Creating a better experience through cross selling;
• Best practices for navigating MBL regulations; and
• The pros and cons of participation loans practices.
To wrap up the year, this month I’ll focus on some “Do’s and Don’ts” that successful credit unions have followed in building their MBL programs. For inexperienced credit unions, the transition into business lending can be particularly daunting, and this may be why comparatively few small institutions have taken the leap (see chart). Business lending is fundamentally different from mortgages and consumer lending, the traditional markets for credit unions. Studying best practices employed by those credit unions with successful track records in member business lending can help credit unions getting started to avoid some common pitfalls. So let’s dive in! DO select your market carefully. Many credit unions enter the business lending arena deciding to focus only on commercial real estate (CRE) lending or up to four-family residential rental properties, ignoring the opportunity to lend to operating businesses. According to Dana Sumner, president of DFTC Inc., a credit union business lending consulting firm, this is a mistake. “Credit unions have a great opportunity if they are willing to shake off the focus on collateral lending, especially in the area of CRE,” she says. “Real estate loans do not have the same impact on a credit union’s local community or the membership as a whole as does a loan to an operating business. If you help a business with a working capital line of credit or loan to purchase a new piece of equipment, it may result in that firm being able to create two or three new jobs. In addition, the pricing on these types of loans can help increase your return on the portfolio exponentially.” DO understand the risks going in. Senior management should fully grasp the unique nature of business lending and how different it is from traditional consumer and mortgage lending. Without management buy-in and engagement, your member business lending program is doomed to fail, “You need to have realistic expectations – it is a business of risk; there will be charge-offs,” Sumner says. “Many senior management teams and boards simply do not understand the resources required to make member business lending successful. Credit unions have a tendency to avoid staffing their business lending shop appropriately, and they make the mistake of setting up for origination, not risk management.”

Member Business Lending

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