Improved Loan Delivery Demanded by Business Borrowers

By Charles H. Green

According to Claude Handley, as published in the American Banker, small-business lending is in need of an overhaul at most community banks. He correctly points out that the lending process at most of these institutions tends to still be paper-intensive, cumbersome and inefficient for both borrowers and bank personnel.

Handley points out that prospective borrowers are required to provide far more Commercial Loan Officerdocumentation than is actually necessary for prudent underwriting. Most banks employ the same application and underwriting checklist for all loans, regardless of the size or complexity of the request, or the characteristics of the borrower.

But, the simple economics of small-dollar loans are both the largest barrier to solving the problem and in fact the majority of the problem. Management of small business borrowers needs to be streamlined and highly automated, but as important, such improvements cannot come at the expense of sacrificing customer service.

This column has advocated for lenders to explore a large array of technology platforms already on the market that can simplify the loan application-underwriting-approval-and boarding process, but that will require some time and expense to convert to, and many smaller institutions are hesitant to let go of a good thing, seeing how their results are reflecting a much rosier picture.

What rosy picture?

According to the FDIC’s recent quarterly profile, community bank profitability was up on average 28 percent last year, with more loans funded to small businesses and the list of problem banks sinking to its lowest level since 2009. And these statistics come in the face of a rising tide of online, innovative lenders who are scratching market share away from banks in several product lines from consumer debt to SME working capital loans.

But that’s today, and we all know tomorrow is another story. Handley notes that ‘dissatisfaction with credit services’ is among the main factors that lead small businesses to switch their primary banking relationships, according to fourth-quarter 2014 survey data from Barlow Research Associates.

The survey also found that the number of days banks spend responding to a credit request is longer than what small business customers expect.

Last year’s results provide no assurance of the results any bank can expect next year. Best advice-keep improving your process or you won’t have customer complaints to deal with, or customers for that matter.

Read more at American Banker

Share This
Twitter LinkedIn Digg Reddit StumbleUpon  

FDIC Report Card Reflects Good Semester for Community Banks

By Charles H. Green

The Federal Deposit Insurance Corporation (FDIC) released their Quarterly Banking Profile recently, that reflected a positive report on the commercial banking sector. Banks and savings institutions insured by FDIC reported aggregate net income of $36.9 billion in the fourth quarter of 2014, down $2.9 billion (7.3 percent) from earnings of $39.8 billion that the industry reported a year earlier.

However, they quickly note that the earnings decline was due to a $4.4 billion increase in FDIClitigation expenses at a few large banks. More than sixty-one percent of the 6,509 insured institutions reporting had year-over-year growth in quarterly earnings. The unprofitable banks in the fourth quarter fell to 9.4 percent from 12.7 percent a year earlier.

While there was a continued decline in mortgage-related income, most banks reported higher operating revenues and improved earnings from the previous year. In addition, the pace of bank lending rose, balance sheet quality improved, and the number of banks classified as ‘Problem’ institutions dipped to its lowest level since 2009.

FDIC Chairman Gruenberg said, “Community banks performed especially well during the quarter. Their earnings were up 28 percent from the previous year, their net interest margin and rate of loan growth were appreciably higher than the industry, and they increased their small loans to businesses.”

The report also noted that the industry’s full-year ROA tallied up to 1.01 percent, the third consecutive year that this metric exceeded 1 percent. As a group, nearly two-thirds of the nation’s banks (64 percent) enjoyed a higher net income in 2014 than in the previous year.

FDIC’s list of “problem banks” dropped for the 15th consecutive quarter, declining from 329 to 291 in the fourth quarter. That’s the lowest since the end of 2008, a full 67 percent below the post-crisis high of 888 at the end of the first quarter of 2011.

Read more at FDIC.

Share This
Twitter LinkedIn Digg Reddit StumbleUpon  

Lendoor Ready to Crowd Into Small Business Financing

By Charles H. Green

Readers of this page should be familiar with the rise of innovative ‘marketplace’ funding, and as such, the term “crowdfunding” should be old news. Made prominent by peer-to-peer pioneers and Lending Club, these platforms originally gathered lots of small checks from individuals or “peers” to finance consumer loans for cars, schooling or even refinancing more expensive credit card debt.

The rest is history, as Lending Club issued an IPO last December with a market value Lendoortotaling $8 billion, and dozens of offshoots, me-too’s and other clever ideas have emerged to capture a portion of this market or create another niche.

One fledgling company who’s working on the next big niche is New York-based Lendoor, which intends to apply the crowdfunding business model to the already most raucous sector of American finance: small-business lending.

This company plans to introduce a platform for local businesses to borrow money from their customers and other individuals they can attract online. It’s the latest effort by a technology company to disrupt functions that traditionally are performed by banks.

The company states that their mission is to “help startups and small businesses nationwide get crowdfunded loans from friends, customers and supporters — instead of bankers — with terms that work for both sides.”

Although their game plan is promising, Lendoor’s mission is on hold, awaiting final adoption by the Securities and Exchange Commission (SEC) of rules pertaining to small investors, which were provided for in the JOBS Act of 2012.

Crowdfunding for business purposes really took off after Congress passed the JOBS Act, lifting a ban on startups publicly asking for investors capital. But the entire provisions of the act have not yet taken effect due to the deliberative process being conducted by the SEC to finalize these rules.

Presently, only “accredited investors,” those with a minimum of a $1 million net worth (excluding their primary residence) or annual income over $200,000, are eligible to participate in equity crowdfunding deals.

The SEC is reviewing Title III of the JOBS Act, which would open the universe of potential investors in crowdfunding to anyone who is able to risk money in the market.

Meanwhile, Lendoor is standing by ready.

Read more at Lendoor.

Share This
Twitter LinkedIn Digg Reddit StumbleUpon  

Legacy Banks Warming up to Innovative Lenders

By Charles H. Green

Whether it’s a case of ‘keeping your friends close–but your enemies closer’–or maybe the recognition of the old axiom, ‘if you can’t beat ‘em, join ‘em,’ but there seems to be a lot of movement from the traditional banking industry toward working cooperatively with rising upstarts in the innovative marketplace funding sector.

Familiar names including Citibank, American Express, SunTrust, Wells Fargo, and even Innovative Fundingthe mammoth credit card payment processor Master Card, are doing deals through a variety of arrangements with the leading–as well as some literal start-up–financing and payment companies that have emerged since the financial crisis.  These novel lending companies have created disruptive business models that are scaling faster than anyone predicted, and are more clearly seen as encroaching on growing swaths of market share from banks across a number of credit and payment products.

“We are open to any and all conversations,” Garry Lyons, the chief innovation officer in Dublin for MasterCard, told the NY Times. Although “disruption is a potential threat to established companies,” he added, “we’re open to working with new emerging companies” to serve customers’ needs. He said MasterCard and its customers could both benefit from “access to external thinking.”

In late 2014, Wells Fargo launched a business accelerator to support enterprises working on tools for the financial services industry, while Citigroup is funding venture investments in companies with the potential to produce disruptive transformation in financial products and services.

American Express has gone so far as to open a technology office in Silicon Valley focusing on mobile payments, cloud computing and big data.

What does this mean for commercial lenders?

This new found love of innovation among the venerable large banks may puzzle many observers, who are more accustomed to the growth strategies exhibited over the past fifteen years, primarily driven by the expansion of leverage and bank consolidation. But faced with a rapidly changing marketplace, it’s a safe bet to assume that many are putting up capital to stay in the game–whatever that game turns out to be.

Today, consumers and business owners seem to be getting new financing options every month. While the competition is fierce, profits are scarce due to the high cost of funding associated with these operations. Enter the banking industry as a partner, with many advantages, not the least of which is cheap, reliable funding.

Many lenders can expect to wake up someday in the near future and learn that one of these dazzling new disruptive financing alternatives is on their list to sell that day.

Share This
Twitter LinkedIn Digg Reddit StumbleUpon  

Kauffman Foundation: Entrepreneurship is in Decline

By Charles H. Green

Just as the economic news keeps getting better, jobs are growing at the fastest rate in a decade, wages are finally starting to unthaw, and the Federal Reserve is getting ready to boost interest rates, the respected Kauffman Foundation drops a bomb: entrepreneurship is officially in decline.

According to an account by the Washington Post, new research shows that the country’s sutb_figuresrate of new business creation, which peaked about a decade ago, plunged more than 30 percent during the economic collapse and has been slow to bounce back following the recession. And that’s despite the fact that, over the last few years, the portion of the U.S. population between the ages of 25 and 55 – historically the prime years of starting a business – has been expanding, according to data compiled by the Kauffman Foundation, an entrepreneurship research organization.

The research is graphically explained by Kauffman’s in the Post through five measurements that demonstrate their conclusions:

  1. New business creation has only recently bounded back from decline following the financial crisis, among both the prime age (25-54) and working age (15-64) entrepreneurs.
  1. Since 2008, business deaths have outpaced new business startups.
  1. Older firms (16+ years) represent a majority of U.S. firms.
  1. New firms are responsible for virtually all new job creation.
  1. Millennials (ages 20-34) aren’t starting new businesses at the rate that Baby Boomers did. In fact, the only demographic not in decline today is in the age category from 45-54.

Bottom line

To offer context around their assertions, Kauffman’s report points out that as a group, Millennials have a low home ownership rate, which is          a traditional source of savings and potential collateral to support starting a business. In addition, many are financially strapped these days, having left college with an impressive upper-level degree that was very expensive, and paid for with education loans.

Kauffman urged policy makers can make conditions more favorable to entrepreneurship for more Americans of all ages and backgrounds.

“Unless we see more entrepreneurship, the kind of economic growth we’re seeing now will not continue,” said Mark Zandi, chief economist at Moody’s Analytics.

Share This
Twitter LinkedIn Digg Reddit StumbleUpon  

Traffic Signal Helps Business Owners Navigate to Funding

By Charles H. Green

One of the perennial challenges in commercial lending–for lenders and borrowers–is getting the right loan application in front of the right lender. In the lending community, we know how credit organizations break down between the various financing products they offer, such as C&I loans vs. CRE lending, or ABL vs. government guaranteed lenders, etc. But many prospective borrowers know one word for all of them: bank.

Collectively, lenders haven’t done a good job of educating the marketplace about the Traffic Signaldifferent financing products available and how to clearly identify the range of companies available to fund their requests. The results are thousands of meetings arranged annually with mismatched borrowing prospects and lending sources, wasting time and effort. And most lenders coming out of these meetings probably miss the chance to offer a sufficient explanation as to what–and who–is needed and why.


The site employs a short list of questions to qualify the kind of funding needed and provides a simple solution for time-constrained business-owners to find the right funder to contact, without requiring any personal contact information to use the site.

The business represents a unique collaboration of several market-leaders for the primary forms of alternative business funding for small business finance. These lenders represent funding for short to long-term loans, debt, equity; even retirement account self-investing management providers are included, and they expect to grow the list of participating lenders.

The loan applicant’s experience is visual and to the point: favorable opportunities are represented with a “green light,” while dead-ends, based on applicant responses, are represented with a “red light.” “Yellow lights” mean more information is needed to clarify an opportunity.

It’s a great tool–check it out and look at the questions for yourself to get a sense of how they sort loan applicants into specific, more targeted funding streams. We’ve got some catching up to do on this side to provide such an effective, collaborative tool to search the small business marketplace.

Read more at AlternativeBusinessFunding.

Share This
Twitter LinkedIn Digg Reddit StumbleUpon  

Is Credit Risk Creeping Up In Your Portfolio?

By Charles H. Green

So your bank survived the financial crisis, maybe with some borrowed money or maybe your own. Your credit box got dialed in and you doubled down on managing workouts to maximize recoveries and lower loan losses as best as you could. After a few false starts, the economy finally moved into recovery last year and now its time to make some money, right?

For the first time it seems in a decade, you finally convince your CCO to make a credit Changing Metricspolicy exception and approve a loan that’s just outside the comfort zone–but in a small, marginal way. And you learned that a peer was given the same consideration for another loan to a coveted client prospect.

And what happened? The sky did not fall, the earth did not quake, and the bank’s assets weren’t seized by the regulators.

So you were back a week later asking for one more small policy exception, that really didn’t affect the debt repayment, just a side issue of little consequence really. And then another one…and another…until your bank was in full swing ‘risk creep.’

Risk creep happens to commercial lending when you get bored with the status quo of the business you have and start looking on the other side of the fence (where the grass is always greener). Or you seemingly can’t compete with anyone else because your credit policy seems to be unreasonably tight, and you have to walk away from almost every deal you work on.

So, you slowly move just a toe over into a riskier terrain. After all, any credit by its nature carries the risk of non-payment, so what’s just a little more flexibility?

When everything goes well with that change in terrain, everyone concludes that things must be safe. So we push the envelope at little further. Then some more. And then, we recognize that we’ve got this risk thing down pat, and it’s time to ramp up the game.

In some banks, the seeds of future failure get sown this way, as credit risk creeps in incrementally. It’s so subtle, that we rarely notice it. Talk to some bankers who lived through a failed credit operation and you hear the same stories:

“I made a number of mistakes”

“We ignored some obvious red flags that all should have been clear signs to pull back from certain loans.”

Many bankers I’ve spoken to look back on their mistakes and see all the obvious warning signs, so obvious that they openly admit how dumb it was to miss them.

The cause? Risk creep, that starts with a plan offering a clear margin of safety, but then slowly, the collective sense it to take just a bit more risk. No one calls it that, and most of the time they don’t even recognize they’re doing it.

As things go well, the perception of risk seems to go down. Lenders start to feel safe and as a result take one small step into territory that was previously labeled out of bounds. And the process repeats. Take a small risk. Things go well. Increase risk. Repeat until failure.

As business development starts heating up in this new year, it’s a great time to examine your credit policy and recent portfolio additions for signs of risk creep. The remedy for risk creep happens to be what some would argue is the most important word in the English language: remember.

Just remember what it was like to watch as your loan losses rose by 100 percent (or more) in 2008. Or what it was like to decline a loan to your best client because of your  banks’ balance sheet, not theirs.

Then take a close look at where your bank is in terms of risk creep and remember: things change.

Share This
Twitter LinkedIn Digg Reddit StumbleUpon  

NSBA Reports Growing Loan Demand Needed to Meet Expansion

By Charles H. Green

There’s an axiom in business financing that reflects an age-old correlation in everyone’s data: the ability of a small business owner to hire workers and their ability to get financing.

According to the 2014 Year-End Economic Report compiled by the Is-your-business-able-to-obtain-adequate-financingNational Small
Business Association, even though the number of companies reporting to be affected by the credit crunch continues to drop—down to 61 percent from 66 percent just six months ago—one-third of small firms still struggle to get the financing they need.

This new layer of capital access frustration comes juxtaposed with the survey’s finding of a 14-percent jump in business owners who project economic expansion in the year ahead.

When asked what kind of financing their company used, there was a notable jump among small firms that rely both on credit cards and earnings of the business. These two are the most quickly accessed forms of financing which could indicate newer businesses seeking financing as well as new opportunities for existing businesses that may not have the track record required by other financing tools.

There are a handful of other contributing factors to the increase in credit card usage as well, including: a five-percent increase in the number of firms who reported winning an increase in their line of credit (or credit card) in the last six months; a drop among small companies who say their credit card terms had worsened in the past six months; and the average interest rate on credit cards dropped from 13.94 percent in July 2014 to 13.05 percent in December.

What does this mean for commercial lenders?

NSBA’s survey found that the absence of capital is impacting these businesses negatively, hindering their ability to grow revenues or provide sufficient increase inventory to meet sales demand they have access to reach.

All this against the backdrop of conflicting signals from the Federal Reserve seeing small business lending tightening as the economy is expanding on all metrics.

With business owner confidence growing, and perhaps the strongest indication of their willingness to hire new employees since the financial crisis, this moment may be a crucial time for commercial lenders to step up to the demand. Whether that means more aggressive marketing, or loosing a few strings around the proverbial credit purse, depends on the organization. But now more than ever since 2008, the market is heating up with loan demand.

For government guaranteed lenders, SBA has shifted capital access expansion efforts into high gear. With several initiatives to waive the “$” flag in more sectors (including credit unions, veterans groups and the LGTB community), the SBA is trying to drum more supply and demand for use of its loan programs. The 2014 SOP modifications to lender/borrower credit standards for loans <$350,000 should help lenders scale access into this sector, and the recently announced LINC portal is geared to connect borrowers directly to lenders.

Read more at NSBA.

Share This
Twitter LinkedIn Digg Reddit StumbleUpon  

Do Clients Laugh With You (or at You)?

By Charles H. Green

It’s likely that most commercial lenders harbor some fond recollections of their early-life introduction to banking, that may have included getting a lollipop from a kindly teller or  being issued a savings passbook to record account balances and interest earnings. But as you’ve likely read here and elsewhere, affection for banks is decidedly scarce in the aftermath of the financial crisis.

A recent AdviceOnLoan article cited the 2015 results of the Edelman Trust Barometer, Laughing clientsshowing only 53 percent of respondents trust bankers, while the NYTimes cites a recent Harris poll as saying only 32 percent of Americans rate the reputation of banks as ‘positive’, which ranks as 13th among 15 sectors, only ahead of the tobacco industry and the government held in lower esteem.

This NYTimes article was about Associated Bank’s (Green Bay, WI) clever advertising campaign to attract new customers using humor–laughs at the expense of the stereotypical banker–and it left me thinking about how commercial lenders market themselves (and their companies) to find new borrowing clients.

In my experience, prospective borrowers will put up with a lot of unnecessary hassle in order to advance their funding proposals forward, while depositors have a much shorter tolerance for putting up with poorly designed customer management and the plain ridiculous expectations of the seller, or in our case, the bank.

SBFI offers a weekly column, Excel@Sales, to encourage ideas and strategies to improve individual’s performance in recruiting new business, but these solutions are not targeting company cultures, but rather the people that make up the sales force. Lending organizations trying to attract prospects (and referral sources) on a broader scale face a much different task.

Sure, you can publish ‘tombstone’ ads, bragging about the deals you funded–for someone else. But I’m not sure that is very eye-catching for the under $10 million set.

Those ads generally don’t even describe details, terms or pricing, and sometimes or even name who received the financing. Also undisclosed is the ugly months-long process of haggling it took to convince your credit committee to approve the deal and time you spend convincing the borrower to accept a watered down version of what they requested.

Can you laugh at yourself and other lenders?

Realistically, marketing to prospective loan client is a challenge. Lenders need to connect with small businesses who are looking for the same kind of capital financing product that the lender wants to provide. Communicating qualifications, deal structure, geographic and other limitations sounds like telling people why they shouldn’t call rather than why they should.

The results are that you have to invite a lot of frogs in for a kiss, knowing that most will not turn into the proverbial prince you seek.

And what about humor as a strategy, such as Associated Bank used? I don’t think it’s a bad idea, because it gets a lot of attention–particularly when you make fun of yourself or the typical image the public holds of people or organizations that do what you do.

Humor is a good strategy to use for recruiting new clients because it lowers the pretenses and tension between the parties to make way for business to proceed.

In the early 1990s, I led a small boutique loan brokerage shop that recruited SBA loans for Heller First Capital and several other metropolitan banks. We had a very small budget for advertising and there was no internet back then to advance our cause.

We developed a few ads with the help of a freelance artist, had them printed on paper and mailed them to our fledgling list of about  a thousand area brokers, lawyers and CPAs. One asked readers how to say ‘no’ in several languages, with the answer in native spelling listed.

When the word ‘English’ was asked, we used the logo of a prominent regional bank in the market to answer, which had a reputation for declining a lot of loan requests.

Another one talked about commercial lenders in general and had an illustration of a wild-eyed chicken running out of the farmyard.

How did it work? Just fine–we got a nasty (and benign) letter from the regional bank’s law firm over the (legal) use of their logo, and our phones rang off the hook with prospective borrowers who wanted to talk about financing.

Share This
Twitter LinkedIn Digg Reddit StumbleUpon  

Is Cuba An Opportunity for Small Business Lenders?

By Charles H. Green

In December, the Obama administration announced an end of the embittered–and total failed–policy of estrangement from Cuba, and official chilling of relations. This announcement has opened the door to normalizing relations that were cut off in the Eisenhower administration more than fifty years ago.

While this action did not lift the economic embargo against the island nation, it will Cuban flagimmediately mean the easing of many restraints, authorized unilaterally by the executive branch of government, and plenty of these will be existing financial restrictions. Americans traveling to Cuba reportedly will soon be able to use credit cards and interface directly with Cuban banks to move money back and forth from the island.

It’s likely that trade will increase dramatically as pressure builds on Congress to abandon a feckless, failed policy of economic isolation, which has not prevented hundreds of thousands of Canadians and Europeans to visit Cuba and take billions of hard currency there. Tens of thousands of Americans also go there annually under an assortment of exceptions for education, culture, journalism and agriculture.

Why does this matter to small business lenders?

The president of the US Chamber of Commerce, Thomas Donahue, representing business groups and companies, also spoke of a barely-contained enthusiasm to invest in Cuba. “The chamber and its members stand ready to assist as the Cuban people work to unleash the power of free enterprise to improve their lives,” he said in a statement.

The Small Business Administration, another interest group, was equally upbeat about the investment prospects. “The best way to ensure opportunity and democracy in Cuba is by empowering the Cuban people — rather than denying them access to resources,” said SBA Administrator Maria Contreras-Sweet.

Business opportunities will impact small businesses who recognize a new market that’s very close to the U.S. and ripe for the demand of a number of products and services. This situation may lead many companies to begin exporting for the first time, and as with any growth, will lead to the need for business capital.

Small business lenders will likely benefit from these opportunities and if fact, it may lead many of them to enter the export/import financing side of financing with the closest neighbor to the south.

I personally traveled to Cuba several years ago and recognized the economic depravity for both sides of my journey caused by the American policy, that predictably led to a no-so-veiled black market for imported goods from the U.S. operated in the open. While inconvenienced without direct flights, many ex-patriot Cubans residing in South Florida cornered the market for supplying the demand for many goods for over half a decade, and it’s from these quarters that the loudest objection to ending the embargo will be heard.

Lenders should welcome and embrace these policy changes, for the opportunities it will open for many clients, particularly in the Southeast.

Share This
Twitter LinkedIn Digg Reddit StumbleUpon