Having just spent a year on the road (virtually) facilitating strategic planning sessions for dozens of credit unions – I can share that nearly all have two areas of high strategic focus through the next two years: Profitable (organic) loan growth and enhancing their end-to-end remote lending processes.
There are several driving forces behind these desired objectives.
Focus on profitable loan growth – The rapid decline in investment yields, a projected decrease in the rate of loan growth and economic risk that could increase provision expenses are realities that have credit union leaders looking for new and/or niche profitable loan opportunities.
Focus on end-to-end remote lending processes – One of the many things credit union leaders learned from adapting to the pandemic, was the need to overcome the inefficient, clunky, and manual issues in remote lending processes. We are persevering through it. But we know that we have ease of access issues that need to be addressed in short order.
Small business lending, a missed opportunity for credit unions
Increasingly common, small business lending is one of the profitable loan growth strategies credit union leaders are discussing. This is good news for small business entrepreneurs, credit unions and the communities they serve. Small business entrepreneurs need credit unions to step up to fill the large and rising need for affordable and easier access to credit.
One the biggest under met demands is access to small balance business loans. These are loans from $25,000 to $250,000. For many existing and emerging entrepreneurs, they are shut out of traditional business lending by the main street lenders (banks and credit unions). Business lenders tend to avoid these loans as they are processing intense and return a low overall yield when human resource time is factored in. So consequently, they “pass” on many of the entrepreneurs that could be successful with a small business loan. An emerging leader in this small business loan space is Fintech. Fintechs are utilizing very efficient technology to remove most, if not all, of the manual processes. They are also effectively incorporating robust alternative data into the auto decisioning process to more efficiently review medium risk applicants, to boost overall approval ratios and minimize risk. Pricing at fintech lenders appears to be higher, and of course doesn’t include the many other things that make credit unions great like, transaction accounts and services only found at a depository institution.
Not sure? Call your local Small Business Development Center and they will tell you that small balance business loan access is in high demand. Many of these budding entrepreneurs may already have their consumer loans and accounts with you. Wouldn’t it be a shame to send them to a fintech when, with some investment, you could profitability and efficiently earn their business?
Two birds, one stone
For those of you that are in the business lending space, and plan to increase profitable lending, and have set goals to improve your end-to-end lending platform, I encourage you to research the opportunities available to include smaller loan balance business lending in your strategic plans.
The good news is that when it comes to end to end loan processing – there is no need to recreate the wheel. Our friends at Experian help credit unions (banks and fintechs) modernize their automated lending workflow, eliminating manual steps, and incorporating alternative data to boost auto decisioning for medium risk borrowers. These improvements remove expensive human resource overhead and minimize risk that results in higher loan profitability, a better process for the member and perhaps most importantly of all – affordable access to credit for more entrepreneurs.
If seamless, end to end remote lending is desired, why not include small business loans into the integration mix and lift your business lending?
Why it matters
Each year, competition for loan growth escalates. Each year, we challenge our lending, technology and marketing teams to stretch and innovate to find new ways to get an edge. The next couple of years will be particularly challenging given very low market rate yields and other economic challenges.
If you are already in or considering small business lending – I encourage you to do some due diligence on the opportunities for small business lending in your local communities.