Member Business Lending--From Scratch

Working for a CUSO that specializes in Member Business Lending is an exciting opportunity. On an average day, I can work with credit unions that have decades of commercial lending experience and credit unions with little or no business lending experience. Fulfilling a unique role for each credit union’s level of experience is challenging, but fun and rewarding.

I am surprised that both our experienced and inexperienced credit unions are asking for training on commercial lending. The experienced credit unions want to further develop their staff and make sure all people involved in commercial lending understand how the loans are structured and managed. The credit unions that are inexperienced with commercial lending want to develop a new line of business to better serve their members while benefiting from better earning assets. This has also prompted a unique question for these credit unions new to commercial lending, which is, how does a credit union start a business lending program?

We had talked with one credit union that asked if we would help them advertise and do other things to attract new business, once we help them put a member business loan policy in place. This was an interesting question, and it really highlights the difference between consumer lending and commercial lending. While advertising and putting a banner up is a good way to attract new consumer borrowers, it would actually do the opposite for attracting commercial borrowers. The commercial borrowers you will likely attract are the types who were unable to get a loan at any other financial institution. Why is this?

Commercial lending requires a lot of work and understanding on the lender’s behalf, and a good commercial borrower knows this very well. To change relationships is to take a big risk and could lead to access to credit on different terms with a different lender. Commercial borrowers don’t like uncertainty, and going to a new institution brings uncertainty.

While occasionally a good commercial borrower will have a relationship soured by a bad lender, it is more often the case the relationship is soured by a bad borrower; thus, it is often the bad borrower on the hunt for a new lender. How is a credit union new to commercial lending supposed to weed out the bad borrowers from the good borrowers?

Really the answer is already right under your nose, and that is the credit union may already have good relationships with depositors or consumer borrowers who now have commercial borrowing requests. To their credit, I think most of our credit unions new to commercial lending already realize this. But still, the question remains as to how to attract new commercial borrowers.

I can really think of two primary ways to find new borrowers, and they both require patience. First, providing exemplary service to a borrower can often lead to additional business. When a borrower is happy, they are likely to do additional business with you and tell others about the great service you provide.

The second way to find quality borrowers is to get involved in the community. Serve on boards, join trade associations, and volunteer in community projects. This really ties back to providing quality service, but for your community. This is a good way to meet new people, and good borrowers will know who you are and take note. You will build relationships with them through work outside of the institution, and they will feel comfortable coming to you with their commercial requests in the future.

This is probably the best advice I can give as to how to grow your MBL portfolio organically, although it is always possible to hire seasoned commercial lenders or purchase participations as well. The key concept to understand is growing a strong MBL portfolio takes patience, because advertising commercial loans like consumer loans will often attract borrowers who were shunned by other institutions.--Trevor Plett