Is Your Institution Structured Correctly? Effectively Running a Business Loan Program

You want to offer business loans, so you write the necessary policy, get it approved and go out and hire the right people. Great, where do you go from there? Now the trick is making sure the right business loans get booked, and the bad ones are warded off. This will require structuring management.

First, you need to ask yourself what type of lending you are engaged in. Business lending will likely fall in to one of two broad categories: small business lending and middle market lending.

Small business lending is usually to people that are characteristically sole proprietors or to small trade companies which are owned by a small group of individuals. They probably need equipment financing up to a couple $100,000, and/or a line of credit of similar size. These relationships are likely under $1 million when all requests are aggregated together, and the individuals probably don’t have a net worth much greater than $1 million either. Small business requests will likely require a small group of individuals tasked with agreeing on and approving the business loan request.

A small business lending department, if in a small institution, will likely be its own department with a manager that directly reports to the CEO/President. A small business lending department, if in a large institution, is often rolled into a larger lending division and reports to the chief lender, or it may even be rolled into retail services or administration and report to either of those heads.

Middle market lending is often characterized by lending requests of business owners or companies that have strong net worth, probably well over $1 million, but are still too small to raise capital through issuing bonds into the secondary market. These borrowers seek to finance investment real estate, have a need for large equipment requests, may need lines of credit of $500,000 or greater, or they have special requests like leveraged buy-outs and special bridge loan needs. In general, the entire relationship is likely no smaller than $1 million.

Middle market lending shouldn’t be treated as a department within the institution, but should really be considered a full scale division. This will require a chief lending officer directly reporting to the CEO/President and a chief credit officer also reporting to the CEO/President. Having only one or the other report to the CEO presents issues, because the top lender will be incentivized to book as many loans as possible, and the top credit officer can be overly conservative and pass up good business opportunities that are worth taking risks. Both heads need a space where they can present their arguments and have others assist with the decision.

This usually leads to a loan committee, which ideally is balanced with lenders and credit officers, but may also include the CEO and CFO. It is a good idea to keep minutes of the loan committee and have a secretary, who has the power to execute approvals or withhold approvals until conditions required by loan committee are met. It is also good practice to have an expiration date for each approval granted by loan committee.

Like all things in life, there are nuances to the product or services offered, and they aren’t always uniform. A business loan isn’t simply lending to a business, but needs to be separated out as small business or middle market. Likewise, you will need different management structures to execute either lending type if you hope to be successful.