The number of companies that have started in the last two years is historically significant. According to the US Census Bureau, nearly 5.4 million new business applications were filed in 2021, the highest number on record. The pandemic has sparked the Great Resignation, signaling a massive shift away from traditional 9-to-5 jobs in favor of more fulfilling entrepreneurial ventures. This, coupled with the Paycheck Protection Program (PPP), has led to a surge in small business loan applications. This trend is expected to continue in 2022 and beyond, as inflation will likely drive more local businesses to apply for loans.
There are three critical categories to consider when updating demand management strategies for small business loans: member experience, difference between credit unions, and balance.
Consumer expectations have changed since the pandemic; small businesses expect digital banking experiences similar to their personal experiences on Amazon. Fintechs have applied this standard to loans, making it quick and easy to borrow money. To avoid being left behind, credit unions need to change the way they lend money; they need to be more efficient at accepting applications, analyzing data, underwriting and making decisions.
Modern technologies are streamlining the lending process and providing an unparalleled member experience and support, bridging the gap between legacy processes and consumer-driven fintech strategies. A complete and flexible solution for loan origination, analysis, underwriting, review and management will increase efficiency, reduce costs and improve communication between internal departments. This approach allows credit unions to spend more time with their members and focus on developing and nurturing those relationships, rather than performing intensive manual tasks. Additionally, automated analytical tools will likely uncover data that could never have been revealed through manual processes, creating new points of interaction between bankers and borrowers. This level of support will ultimately increase member retention rates and attract leads. Additionally, having a system that can handle both small business and consumer loans will create additional cross-selling opportunities.
The Credit Union Difference
The added level of insight and time allotted to members will also allow credit unions to become trusted advisors that small business owners can count on, not only during the financing phase, but throughout the lifecycle of their business. their businesses. Credit unions have a financial responsibility to be good partners for their members. It also means guiding entrepreneurs who may not have the experience of the lender, improving their financial education and ultimately the financial health and long-term success of the business. Trusted advisor status is one that fintechs will never achieve. Fintechs tend to do a great job of providing a digital solution, but to be successful an entrepreneur needs a whole range of financial services, expertise, and mentorship that credit unions are known for.
It’s also important that loan diversification remains a priority for any credit union, especially with the rate of change we’re seeing in the economy. Having a diversified loan portfolio enables credit unions to improve the quality, resilience and performance of their assets, while minimizing risk. Most financial institutions have a diversified investment portfolio, but pay attention to their loan portfolios, which constitute the bulk of their assets and the greatest source of risk. They tend to take out all the loans they can get, resulting in concentrations based on geography, industry, asset size and business type. To avoid concentrations of lending to small businesses, credit unions should use exchange, sales and loan participation platforms offered by technology providers, which allow them to exchange opportunities. These open and flexible solutions can help credit unions increase their liquidity and manage their loan portfolios more strategically over the long term. They also eliminate the costs of working with a broker and provide unbiased access to opportunities across the country.
The instinct of credit unions might be to accept as many small business loan applications as needed to support their members and community and supplement a deposit-rich banking climate. However, diversification of the loan portfolio will offset the risks and provide a healthy and stable flow of assets.
Competing with the fast, user-friendly funding options offered by fintechs, credit unions must also upgrade their technology stack and refocus their attention on providing the personalized member experience they are known for. And, when done wisely, this approach will develop and sustain long-term relationships that will secure and grow the future of credit unions as leading financial institutions.
Gary Lewis is Managing Director, Loan and Deposit Solutions for Jack Henry & Associates in Monett, Mo.