One of the challenges of credit unions and community banks is how to effectively manage a business loan that is smaller in size. Regulators on the NCUA side may tell you that any business loan below $50,000 is considered to not be a business loan. Many institutions have set up systems to review and approve smaller dollar loans using less volume of information compared to the larger and more complex loan requests.
Once the smaller loan is approved, and I will note that the size is relative to the size of the institution, how is this effectively managed? Are complex annual reviews required? What about huge details of information that would be needed to judge the risk in a complex credit? Why would I demand annual financial statements on a $51,000 loan to finance a small rental real estate and not require the same if not more information on the $75,000 vehicle loan?
I recently spent time in an institution who were told that intense reviews were required on all their business loans above $50,000. The institution has a lot of smaller business loans as they are located and serve a small rural community. Many of the smaller ones are tied to real estate or some equipment. If you drew a line at relationships below $100,000, this would cover around a quarter of their business loans. If they suffered a total loss on the entire aggregates of these credits, the total would not exceed $1,000,000. Sure, it would hurt their return on assets, but not as much as if their largest relationship, over twice the size of the aggregate of these, were to suffer the same total loss. Furthermore, experiencing a total loss on all the small loans would not be very realistic.
This quandary forces us to think critically. We live in an imperfect world where we all have tremendous demands on our time at work and less limited time resources available to give. We must learn to prioritize our time and spend time focusing on larger credits, or problem credits that pose a more immediate risk to the institution’s capital.
What is most effective is to set forth procedures for lower balance relationships that have less risk characteristics. Limits should be set on loans that should be viewed in depth every one, two, or three years. The following is a list of some characteristics to consider setting in policy that allow a loan to be viewed less frequently.
· All necessary documents to perfect the collateral are filed and valid. Collateral should be a type which has stable value such as unimpaired commercial real estate
· LTV must be within loan policy limits
· Property taxes must be reviewed and current
· Loan must have had no late payments in the past 12 months
· Property insurance must be current with lender named as mortgage holder
· Personal and business credit reports and legal check must show no late payments or problems
· There must be no requirements for any government guaranteed organization to complete a risk review annually or more often
· There has been no request for additional credit within the past 12 months
· The loan must not have any requirements for annual covenant checks or these covenant check should be shelved and this action described in the review memo.
· Loans that have owner-occupied real estate could be looked at less frequently than those are not owner occupied.
These are a few ideas to help manage your credits better. Managing your portfolio requires some prioritizing of your time to those credits which require more efforts.