Outside the Commercial Real Estate Box

Credit unions want to be relationship lenders, but when it comes to business members, they’re primarily product lenders—they finance one piece of a business’s credit needs: commercial real estate. CUs often struggle to provide business operations funding and some of the more complex deposit services that go with operations.

$19 billion BECU, Tukwila, Washington, like most CUs that do business lending, is mostly a commercial real estate lender, but it is starting down the relationship path. More than 90 percent of BECU’s $1.3 billion business loan portfolio is CRE, says Scott Strand, CCE, SVP/member lending, business and wealth management. “We do some unsecured lines and business credit cards, but the vast majority of our loans are commercial real estate,” he concedes.

That will change, but not dramatically, he predicts. “We have 50,000 business members with over $750 million in deposits, so the potential is definitely there to do more business operations lending. Small business is a powerful growth area. We’re upgrading our deposit services around business needs and doing more with treasury management, adding staff that specializes in business relationship management,” he reports.

CUs are on the cusp of becoming strategic business lenders, but there are difficulties, observes James R. Devine, CEO of Hipereon Inc., Kirkland, Washington, and faculty member at the CUES School of Business Lending™. “We’ve done focus groups with small businesses, and they like the idea of working with credit unions if the credit unions are committed and not just experimenting, and if the CUs have the talent and services to meet their needs. They’re not confident that the talent and commitment are there, so credit unions have some convincing to do, and probably some building,” he says.

Devine reports that, as with BECU, business loans across the CU industry are 95 percent commercial real estate. “Credit unions have to learn to lend to the operating business to diversify and gain fee income,” he says. CUs also lack a sophisticated funding strategy for their CRE lending, he adds. They don’t have nearly enough business deposits to fund business loans, so they use consumer deposits and Federal Home Loan Bank loans. Those funding sources reprice quickly when rates rise, while the CRE assets reprice slowly, which already is leading to a net interest margin squeeze of as much at 50-75 basis points, he notes.

CUs can cherry-pick transactions and make the mortgage loans on business property, but that’s not building relationships, Devine insists. “Credit unions that want to partner with businesses need to ask why a business would choose a credit union for their primary financial institution and build the products and services that would satisfy those business needs,” he says. “They need to start thinking more strategically and holistically about business financial services if they want to build a loyal business segment, and they need to do it in a sustainable way.” 

Systems also pose a major hurdle to expanding business lending services. When you try to expand beyond CRE, you run into system limitations and cost/benefit analysis that make the move hard to justify, observes Joel Pruis, senior director and practice leader for commercial lending at Cornerstone Advisors, Scottsdale, Arizona. 

“When you look at products such as lines of credit and sophisticated deposit services, you’re likely to find that the credit union’s core systems don’t support the accounting or functionality they require,” Pruis explains, “and you’re left with making a substantial up-front investment and hoping the business grows to support it or cobbling together spreadsheet-based patches and some manual activity until you can build the volume to justify the investment in the necessary commercial systems.” Faced with that dilemma, a lot of CUs stick with commercial real estate, he notes, which their current systems support.

There’s also a knowledge obstacle. Small businesses are often naïve about their borrowing, Devine says. “If they get approved for a loan, they’re happy. If it’s for a large amount, they feel successful. But too often the loan is not tailored to what the business really needs. It’s not for the right amount or the right structure to suit their business flow.” Neither small business borrowers nor credit unions have learned how to do that expert tailoring, in many cases, he says, but it’s a service that business members must have to avoid getting dragged down by an ill-fitting loan. “Small businesses have told us that they would be willing to go with a lender that didn’t offer the lowest rate and the fewest fees if the loan came with expert advice,” he reports.

Many credit unions have recognized the need to offer some form of personal financial management to their consumers, Devine notes; now they have to do the same thing on the business side. To get there, a few pioneers have been hiring cash management or treasury services pros from banks and CPAs with business accounting chops to complement their commercial lenders. But the real opportunity, he says, is for CUs to grow their own experts by sending staff to commercial lending schools. Attendance at Hipereon’s own schools has been steady, he reports, but demand will be greater if credit unions recognize that they need to field a brigade of well-trained, proactive business banking professionals.

“Your talent is your brand,” Devine adds. “You need outgoing, personable people who are quick to understand small business structure and needs, to get to the chemistry. A lot of small businesses are thirsty for that kind of collaboration. Investing in education makes a lot of sense.”

And it will be good for income. Most credit unions make about 75 percent of their business banking income from net interest margin and 25 percent from fees, Devine points out. “It needs to be closer to 50-50,” he insists, “and the fees need to expand from transaction processing fees, which make users grumpy, to fees for services they need and want to buy, which will make them happy.”cues icon

Richard H. Gamble is a freelance writer based in Colorado.