The competitive advantage credit unions have over banks is an ability to provide a superior level of customer service. Providing customer service in retail financial services is fairly straightforward: be polite to the customer, and try to help them within the maximum extent of your ability.
How this customer service model translates into the commercial lending world can be problematic. Commercial borrowers certainly deserve politeness and a helpful attitude, but CU staff must understand that backstops that exist in consumer lending don’t necessarily exist in commercial lending. Commercial borrowing requests don’t readily offer a concrete set of metrics that can have a computer model score the loan as good or bad; rather, commercial loans require a lot of human judgment to subjectively evaluate factors a computer cannot account for.
The factor of human judgment in commercial lending often leads to two interesting problems. The first being a CU rejects doing business loans because they feel incapable of underwriting the risks involved. This is a conservative approach, and it is understandable. Why take a risk you don’t understand? Fortunately, CUs can help members with business loans by referring the lending request to a business lending CUSO. Even if the CU does not wish to participate in the lending request, or find that a borrower will not qualify as a member, a business lending CUSO can solve these problems. In this way, your members and non-members can receive superior customer service from the CU and still have access to business lending services.
The second and more concerning issue is when a CU decides to takes on a commercial lending request, but treats it like a consumer loan. Because a credit union wants to provide superior customer service, they feel it is acceptable to extend credit, so long as a customer maintains a decent credit score and good reputation.
It has been my experience that while business owners have great products and services, their expertise doesn’t always translate into a strong understanding of financing. This puts the loan officer into a role of having to help the member understand what they can and cannot do with debt financing. An inexperienced loan officer may believe that a business owner would not request a loan unless he could assuredly repay the loan. This is often not the case. The business owner may not understand how financing works and need a loan officer’s expertise to help understand their financing needs and limitations.
If a loan officer feels that superior customer service means finding any way to give a business owner a loan which they request, the business owner may take on more debt than they can handle. Because there are not metrics like debt-to-income or credit score to indicate the member is in over their head, an inexperienced lender may not realize the potential harm the additional debt can create. While it may seem counterintuitive, sometimes the best decision for the member is not to take on additional debt. It is challenging to say “no” to a member, when saying “yes” seems like better customer service. But helping the member understand “no” is the better decision can lead to your member finding ways to better structure their business for longer term success.
Credit unions are in a unique position to help members that are business owners. They can refer business to a business lending CUSO if they are uncomfortable doing business lending, or they can consult with a CUSO if they want to make sure they are underwriting a business loan correctly. The important issue at hand is delivering superior service. Superior service doesn’t mean the member has to go to a different institution for a business loan, but superior service also isn’t about giving a member a business loan that can ultimately harm them. Customer service isn’t giving the member everything they want, but helping the member find what’s best for them, and that is a tough balancing act no matter what industry you work in.