It’s been nearly three months since the coronavirus pandemic has halted the economy, closing the businesses and offices across the country. Many credit unions’ business lending portfolios are heavily focused on commercial real estate (CRE) lending, and they recognize the need to diversify and expand their business member banking model to reduce CRE concentration risk. “The pandemic almost turbo-charges the transition that credit unions need to take away from a CRE-only focused model,” Jim Hanson, Principal at JDH Consulting, noted on a recent Abrigo webinar, Crisis Business Membership Strategy in 2020: Adapting Technology and Executing in the New Normal. Aimed to mitigate the economic impact of the coronavirus pandemic for small businesses, the Paycheck Protection Program (PPP) has been a critical foothold for community financial institutions seeking to obtain and diversify business lending relationships.
How the Pandemic and PPP Have ‘Turbo-charged’ New Business Lending Strategies
- The Paycheck Protection Program (PPP) has been a critical foothold for community financial institutions seeking to obtain and diversify business lending relationships.
- The key to making the PPP a profitable investment is to deepen these relationships into strong business relationships.
- Proactive outreach, reimagining the purpose of the branch, and evaluating business lending technology will be critical for PPP lenders and non-PPP lenders post-pandemic.
PPP opens the door for new business lending relationships
When the PPP launched, small business owners scrambled to access the finite funds, and many were frustrated as they were turned away from big banks due to added stipulations, such as not having an existing credit line or loan with the bank. Credit unions, on the other hand, embraced the opportunity to gain traction with small businesses, reinforcing their commitments to supporting local communities.
The program and the influx of new business also resulted in a significant workload increase on resource-strapped institutions. Some credit unions took a proactive, high-tech approach to PPP lending, resulting in greater efficiency for the institution and increased loyalty and appreciation from members, but the effort can’t stop there. “We have to have a strategy in place to increase engagement or the portfolio is going to be a considerable drain on resources over the next couple of years as it sits on our books,” Hanson said. From a profitability perspective, the main attraction to issuing PPP loans is the processing fee the SBA issues to the lender. The remainder of unforgiven loans carries a 1% interest rate over the two- or five-year period, and, with over 65% of PPP loans in the second round amounting to $50,000 and under, these loans alone won’t be huge money-makers for financial institutions.
The key is to deepen these PPP relationships into strong business relationships.
If a credit union is an active PPP participant, it should be considering how to engage these small business members next to strengthen relationships. Now that credit unions have established themselves as business lenders, it could help lead to the diversification of the institution’s business lending portfolio, such as targeting more profitable C&I members. Credit unions should evaluate existing technology and platforms to determine the technologies needed to adapt and meet the needs of diverse business members to deliver products and services efficiently.
Reimagining branches post-pandemic to support business lending
States are beginning to loosen stay-at-home orders and businesses are beginning to open back up, but that doesn’t mean we’ll be going back to “normal” anytime soon. Credit unions should be considering how to target and engage business members post-pandemic effectively. “Let’s face it, going forward, our members – both consumers and businesses – are getting more comfortable with alternative channels,” Hanson said. “We’re going to see less traffic in our branches, but this is a time to think about how we can effectively use our branches in order to target small businesses.”
Currently, PPP lenders and borrowers are moving into the forgiveness stage of the program. Hanson recommends using PPP forgiveness to “jumpstart” a viable small business program within the branch to help with the forgiveness process, and with the extended 24-week forgiveness deadline, financial institutions have more time to implement this. Branches should have designated subject matter experts (SMEs) prepared to work through forgiveness with borrowers. The PPP is a complicated, fluid process that has changed numerous times since its initial launch. Lenders should proactively reach out to members to help with simple advice, including ensuring they understand their forgiveness application.
Credit unions’ strategies should center around developing a solid relationship with the member. Hanson encourages institutions that have leveraged technology for PPP to continue that strategy for the technical portion of PPP forgiveness, but to create a highly personal experience when contacting members. “We have to make sure the PPP portfolio is profitable,” Hanson said. “We have to work on the member experience and build a foundation to grow our small business presence in our communities once this all settles.”
The crisis has sparked an important wake-up call for credit unions to become more involved in business lending. For credit unions that weren’t active PPP lenders or didn’t participate at all, it is even more important to put a strategy in place to establish a small business program. These credit unions would also benefit by training members service representatives to act as SMEs and develop profiling skills to make effective service calls. Hanson recommends partnering member service representatives with relationship managers and lenders for complex member referrals and mentoring. Regardless of whether or not a credit union participated in the PPP, all credit unions should be taking stock of the institution’s technology for small loan applications and underwriting process, and how the credit union may be able to leverage technology to make those processes more efficient.