How credit unions can expand into business lending while minimizing risk

As credit unions look to diversify their offerings and increase member engagement, expanding into business lending is a natural next step. Business lending provides businesses with opportunities to borrow money to fund operations, purchase equipment, or expand their footprint. This includes term loans offering lump-sum payments with fixed repayment terms, and lines of credit that provide flexible, revolving credit to meet working capital needs. Business lending not only strengthens the financial position of local businesses but also fosters stronger, long-term relationships between credit unions and their members. This expansion drives local economic growth and enhances the overall value proposition of credit unions to their communities.

However, business lending presents unique challenges for credit unions. Unlike traditional consumer loans often backed by tangible assets, business loans may involve more intangible collateral, such as business assets, including inventory or accounts receivable. Additionally, many credit unions may lack the internal expertise required to navigate the complexities of monitoring this type of commercial lending. Credit unions face higher risks and potential losses if they don't fully understand business dynamics, credit risk assessment, and effective portfolio management. Business lending involves handling various factors such as changing market conditions, competitive pressures, and regulatory compliance, which requires a strong risk management system.

Credit unions can manage business lending risks by using a comprehensive risk management strategy. This starts with assessing each loan using the five C’s of credit, both prior to and during the loan packaging and underwriting process:

During the initial interview process, it’s crucial to ascertain as much of the 5 C’s information as possible for this type of lending. Additionally, credit unions should conduct thorough financial analysis and underwriting practices. This includes in-depth credit checks, analyzing financial statements, and understanding the borrower’s industry and market conditions. Accurate collateral valuation and regular stress testing can also help prepare for potential challenges.

By implementing these strategies, credit unions can confidently manage business lending, fostering growth and success for both the institution and its borrowers.

Portfolio diversification is another key strategy credit unions can use to minimize risk while expanding their business lending activities. By avoiding concentration in a single industry or sector, credit unions can protect themselves against economic downturns that disproportionately impact specific market segments. Setting limits on exposure to any one sector helps ensure no single event or trend significantly undermines the stability of the entire loan portfolio. Additionally, geographic diversification can reduce exposure to localized economic challenges and create a more balanced and resilient portfolio.

Offering a diverse range of loan products further strengthens the portfolio by meeting the varied needs of business borrowers. By providing term loans, lines of credit, and other specialized lending products, credit unions can address different business needs and reduce their overall risk exposure. Proactive portfolio management using automated tools allows credit unions to continuously monitor loan performance, identify potential issues early, and take corrective action before defaults occur. Tailored servicing that considers the specific needs of each borrower enhances the likelihood of successful repayment and minimizes potential losses. Advanced data analytics help portfolio management more rapidly identify risks and patterns not immediately apparent through traditional analysis.

Maintaining open and consistent communication with borrowers is equally important. Regular engagement helps credit unions stay informed about a borrower’s evolving financial condition, allowing them to adjust loan terms or offer support when necessary. This proactive approach strengthens relationships with borrowers and reduces the likelihood of unexpected defaults. By offering financial education and advisory services, credit unions empower borrowers to make sound financial decisions, further enhancing the likelihood of successful loan repayment.

Partnering with a Credit Union Service Organization (CUSO) offers significant advantages for credit unions looking to expand into business lending while minimizing risk. CUSOs allow credit unions to increase efficiency by 30–40% in business lending operations through shared resources and automation, according to Callahan & Associates, CUSO Strategy Report 2022. Another benefit of working with a CUSO is risk mitigation. CUSOs bring specialized expertise in commercial underwriting and loan structuring, enhancing the quality of lending decisions. They also allow credit unions to share operational infrastructure, reducing direct costs and minimizing operational risk. By leveraging a CUSO’s expertise and resources, credit unions amplify their capacity to manage business loans effectively and avoid costly mistakes. CUSOs can facilitate knowledge transfer, enabling credit unions to build their internal capabilities over time.

Access to business lending expertise is another key benefit. Many credit unions, particularly smaller institutions, do not have the internal resources or experience required to effectively manage commercial and industrial lending. By partnering with a CUSO, credit unions gain access to specialized knowledge, cutting-edge technology, and advanced analytical tools and improve their ability to assess risk and manage complex lending relationships. CUSOs often employ experienced professionals, allowing credit unions to compete effectively in the business lending space.

CUSOs also help credit unions navigate the complex regulatory landscape associated with business lending. Compliance with NCUA guidelines and other regulatory requirements can be challenging, especially for credit unions new to the commercial lending space. CUSOs provide guidance and support to ensure credit unions remain compliant while expanding their business lending capabilities. This enables credit unions to grow their portfolios without violating regulatory constraints. Additionally, CUSOs stay current with regulatory changes and compliance standards, helping credit unions stay ahead of potential challenges.

To successfully partner with a CUSO, credit unions should begin by identifying the right CUSO partner. This process involves evaluating potential partners based on their expertise and reputation. And I cannot stress this part enough—making sure that the CUSO aligns with the credit union’s strategic goals and “personality”. It is important to select a CUSO with a proven track record in business lending while sharing the credit union’s commitment to serving members and supporting community growth. Conducting due diligence, including reviewing case studies, client testimonials, and performance metrics, can help credit unions make informed decisions.

Once a suitable CUSO partner is identified, credit unions should carefully evaluate service agreements and governance structures. Clear agreements outlining roles, responsibilities, and performance expectations help establish a solid foundation for a successful partnership. Shared governance structures promote transparency and accountability and are essential to maintaining alignment between the credit union’s objectives and the CUSO’s operations. Establishing key performance indicators (KPIs) and regular performance reviews ensures both parties remain accountable and focused on achieving shared goals.

Effective communication and ongoing collaboration contribute to the success of a CUSO partnership. Regular dialogue and information sharing ensure both parties remain aligned and responsive to changing market conditions. By fostering transparency and mutual trust, credit unions and CUSOs can work together to optimize business lending performance and achieve shared goals. Joint training sessions and cross-organizational learning initiatives further strengthen the partnership and promote knowledge exchange between the credit union and the CUSO.

Expanding into business lending presents an exciting opportunity for credit unions to deepen their relationships with members, support local businesses, and contribute to community development. By implementing robust risk mitigation strategies, diversifying their portfolios, and leveraging the expertise of a CUSO, credit unions can minimize risks and position themselves for long-term success in the business lending space. Engaging with an established CUSO allows credit unions to access specialized knowledge, reduce operational costs, and ensure compliance with regulatory guidelines, all while expanding their ability to meet the evolving needs of their members. When credit unions take proactive steps to strengthen their business lending programs, they build a sustainable future and make a meaningful impact on the communities they serve. By embracing innovation, fostering strong partnerships, and maintaining a commitment to sound risk management practices, credit unions can navigate the complexities of business lending and create lasting value for their members and communities.