3 Steps to Maximize Benefit from Credit Union Business Lending Regulations
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by Paul J. Giefing
S. 2231, the Credit Union Small Business Jobs Bill, was introduced in March 2012 by Senator Mark Udall of CO and is (painstakingly) trying to make its way through the system. This legislation would raise the current arbitrary cap on credit unions’ small business lending from 12.25 percent of assets to 27.5 percent. This one simple move would free up an estimated $13 billion in additional capital and create over 140,000 new jobs in the U.S. Moreover, this proposed legislation will not cost the taxpayers anything.
As a longtime member of the banking system, my feeling is that this bill is just too logical to turn down and will likely pass in the next twelve to eighteen months. With this as my assumption, I want to review three very big steps that all credit unions should take NOW in order to fully and effectively take advantage of S.2231.
1. Align your credit policy and your marketing now.
Now, I am not suggesting you bet the farm on this bill being passed in the next year, but I do want to remind you that credit policy change and the subsequent marketing campaigns that support it take time. Designing your new policy to capture a certain percentage of your local business loan market or to fill a determined portion of your portfolio is going to take planning and some educated foresight. More entrepreneurs and small businesses are popping up weekly as big business shed weight and people find a way to succeed. Your capital will be an essential component of their growth and survival. Make sure your new policy casts a wide enough net to give most these eager folks a look. The fact is; to succeed in putting some of this new capital to work, you will be taking on some additional risk. This is not a bad thing, just a change in mindset. Your creative vision is what will set you apart from every other CU in the market.
Once you have designed the net, you’ll need to get it out there. This is one area where the majority of CUs just miss the mark. Marketing and promotional campaigns need to be measured twice, implemented effectively and monitored constantly. Times change and so do people’s tastes and needs. Be sure your institution is putting out some feelers in the market to see what local businesses are interested in or need. Putting a campaign together from ‘gut feeling’ or common sense can result in lots of wasted time and money. Instead, use short surveys and some personal contact to collect data from your target audience. Remember, statistics become more valuable as your sample size grows.
Once measured, utilize specialists to launch and maintain your campaign. Companies like Constant Contact have made this a science. Moreover, they maintain the resulting data and provide you with reports. This is key in honing your campaign over time and maximizing its effectiveness. Throw in the time saved and you have a campaign ROI that looks like a steep upward curve and not a mess of peaks and valleys.
2. Avoid Business Loan ‘Myopia’.
Your credit policy is the real driver here, but this often gets lost in translation once the potential customers start showing up. It is very easy to look at some government data on business or industry performance and start crossing things off your ‘perfect’ list. Instead, you need to maintain a case-by-case mindset and start growing your ‘maybe’ list. Diving into the ‘perfect’ customer market has two major problems;
- Everyone else wants to make these loans as well. This means you will spend a lot more money to try and win them and will have to give away a lot of profit on the way.
- Because of the intense focus, most CUs will bite off more than they intended to chew. This is how portfolio concentration issues are born.
The risk / reward measure for any loan is never an exact science and branching out to new business or collateral types will be a learning process for most. In some cases, third party originators or underwriters can make this a smooth transition and even spawn some new ideas. Your CU may have a lending cap, but your creativity should know no bounds.
3. Be Prepared to More Actively and Reactively Manage Your Portfolio.
As I stated earlier in the article, expanding your vision and capturing more of this business loan market will undoubtedly result in some small increase and ‘change’ in risk composition. While a good approach will still build a healthy portfolio, you will need to keep a keen eye on the behavior of these new asset types and be prepared to affect some change in response to or in anticipation of this behavior.
Technology is invaluable here. Metrics don’t lie when it comes to portfolio performance and there are numerous options for monitoring this on a daily (or even constant) basis. While you are gaining experience with these new assets, watch for industry trends, economic changes and even federal legislation that may affect their health, either positively or negatively. Coupled with the metrics, you can make adjustments and recommend changes without acting harshly.
If changes are needed in response to regulatory or performance issues the same suggestion applies. Software platforms like UPLEX Global are designed to help portfolio managers react to issues like concentration, liquidity or performance quickly and cost effectively. There is no perfect portfolio and regulations won’t be getting easier, so when active management reaches its limitations, ‘reactive management’ is essential to growth and survival.
In summary, the proposed S. 2231 legislation is a great idea and should result in some strong positive growth in local economies across the U.S. It might not happen today, tomorrow or even this year, but I believe it will be adopted. When it does, CUs cannot afford to waste time getting up-to-speed after the fact. The sooner they can insert themselves into the larger business loan market and utilize their new potential, the more opportunities they will have to maximize benefits and gain clients for life.
For additional information about the benefits of participating in the growing secondary loan market and how UPLEX Global can help, and/or to be invited to one of our upcoming free industry webinars, email your request with contact information to: sholmes@uplexglobal.com.