Planning for the Next Step
This weekend I decorated my house for Fall. You know—pumpkins, Fall colors, etc. When I was finished, I started thinking about the next step…CHRISTMAS! As I was pulling out the Fall decor, I saw the Christmas decorations. That got me thinking about Christmas trees, baking, snow, gift buying…the list goes on and on.
None of us would approach the holiday season without some sort of plan. A list of gifts to purchase, cookies to bake, parties to attend. Careful planning can make a potentially stressful time less stressful.
And yet, many times we want to dive into a new initiative at the office with little to no forethought or planning. This makes a very stressful event also become, well, crazy.
Let’s talk a bit about the steps one should consider when adding a new line of business in lending. Many financial institutions struggle with the need to prepare for this. Most want to jump in and “just start lending” and not worry about the details. But the details are what can make or break success.
As an example, a financial institution is looking to segment and focus on small business lending. (My team hears this scenario often.) The executive team has indicated the need for increased small business lending to help diversify the commercial loan portfolio, which is heavily weighted to CRE. (Any of this sound familiar?) So, now what?
- Define small business—How will you define small businesses? By total exposure, loan amount, product type, origination channel? This one decision will determine all your next steps. There is no right or wrong answer. But you need a definition that is consistent and clear.
- Evaluate businesses in your footprint—What small businesses are in your footprint, and do they match the definition determined above? Are they industries you are familiar with and comfortable lending to? They might include retail, restaurant, light manufacturing, etc. What is the small business client potential in your footprint? Look at your current deposit portfolio. Are any of your deposit-only businesses also potential small business loan customers? Which clients are currently in your commercial portfolio that could be moved to small business?
- Policy (which reflects your FI’s credit culture)—We can never forget policy! Small business lending will need a separate loan policy. Within your financial institution’s culture, are you willing to streamline the financial analysis for small business lending? Get less financial information by amount and detail? If not, you may not be ready for small business lending. How about using a credit scoring process to aid in decision making? Policy will help guide the initiative and aid in limiting risk. Will the field (Relationship Manager) be able to reverse decisions by the Underwriter? If so, how will this be documented and tracked?
- Products and pricing—Small business needs its own loan and deposit products. It is not enough to simply scale down commercial lines of credit, term loans, and deposit products. Small business lines of credit typically have no cleanup period. Instead, the financial institution should look for movement on the line. Small business loans do not typically have covenants or requirements for annual financial statements. Proactive portfolio management is used instead.
You will most likely want to create new products on the core that are dedicated to small business. If this is not feasible, there needs to be a way to note small business loans and relationships for reporting purposes.How will you price these new small business loan products? There is more risk, so there should be more reward. The spread needs to address this risk using measurable factors like score, term, collateral, etc.
- Staffing—For small business lending to succeed there needs to be dedicated staff. It is not effective to just add this segment to the commercial lending team. (Let’s be honest: as a commercial lender, if I have the choice between a $50,000 deal and one that is $5,000,000, which will I choose?) A dedicated person or team can focus on the small business client, giving them the priority they need. Remember, speed to decision is a big factor in small business lending.The branch team is also an effective way to bring the small business products to the market. Customers from small businesses are in the branches often and usually have a good relationship with their Branch Manager. If you follow this model, it is important to remember to train the branch staff on the small business loan and deposit products.
Don’t forget—your Operations team will also need to understand the differences in small business documentation and monitoring. There will also be a need for an Underwriter—someone with enough authority to approve the applications sent in by the field. This person should understand lending and credit.
- Other—There are many other areas to consider…too many for a blog, including: budget, marketing, loan origination systems, online presence, scorecards, portfolio management, reporting, etc.
Much thought is needed before executing on a new line of business. With good planning and an understanding of next steps, this expansion can be a success!
Some general resources on developing a project, expansion, etc. are:
Posted on October 11th, 2019 at 12:30 pm
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