Due to their size and complexity, small business and commercial loans are more time-consuming to originate and manage over the life of the loanand typically comprise a larger share of the balance sheet compared to their consumer-focused counterparts. They also drive an outsized share of profits and balance sheet risk as well.Business and commercialloans and deposits continue to be a top growth priority among banks in 2020, according to Cornerstone Advisors. Due toa high demand by both lenders and borrowers, 2020’s commercial lending activity, both in originations and modificationsis anticipated to exceed2019 because of COVID-19.
There are three key areas of business and commercial lending that banks and credit unions can focus on to grow and manage their lending portfolios in 2020.
Small Business Administration Lending
Many small businesses seek capital to finance exciting opportunities, bridge financial gaps, and fund growth initiatives, among other things. Running out of capital is the second most common reason that small businesses fail. In fact, 29 percent of small businesses that fail do so for this reason. Almost half of small businesses applied for a loan last year. According to the Federal Reserve’s Small Business Credit Survey, 43 percent of small businesses submitted an application to a small business lender last year. In the first quarter of 2020, it was predicted that 25 percent of small businesses that need capital would apply for a small business loan, according to research from Balboa Capital, representing a strong growth opportunity for credit unions and banks.
Commercial and Industrial (C&I)
While both banks and credit unions have typically focused on other forms of lending, there is good reason for them to shift focus to C&I lending as the demand for such loans is increasing in 2020. According to the Federal Reserve Bank, values for these short-term business loans reached a new high in the second quarter of 2019, with $2.35 trillion in loans extended. In fact, in February 2019, C&I loan growth reached 9.1 percent YoY, the strongest pace in three years and C&I loans are expected to increase on average 4.8 percent in 2020. C&I loans make up a large part of the five of the largest U.S. banks, in fact these banks report that 40 percent of their portfolios consist of C&I loans.
Commercial Real Estate (CRE)
This year marks the beginning of new strategic opportunities in real estate financing. While financial institutions once wanted to fund only traditional property types such as office, industrial, retail and multifamily, they are now interested in more specialty properties such as medical, self-storage, parking, hospitality and other niche facilities. These new asset classes offer opportunities for lenders and borrowers alike. CRE loan growth is expected to grow 4.3 percent in 2020. In fact, approximately 64 percent of commercial and multifamily firms anticipate growth in overall loan originations this year and nearly 16 percent forecast that growth to be above five percent, according to the MBA’s Commercial Real Estate Finance Outlook Survey.
While the predicted growth and the need to proactively mitigate risk creates opportunity for lenders, many are finding that their loan origination and supporting life of loan processes need an update in order to meet the current and anticipated demands. Just as bankers invested heavily in new technologies to reduce friction and improve the user experience in consumer lending, it is now time for the same to be done in the business and commercial lending arena.
Commercial borrowers alike are expecting to have quick loan approvals, fewer to no duplicate requests for information and a streamlined submission processes for ongoing documentation requests. These requests can be difficult to meet for commercial lenders still utilizing disparate technology systems that cannot communicate effectively andrequire manual input of data between systems. This process feeds into the borrower’s dislike of slower approvals, duplicate requests and human error, not to mention the added time and cost to originate for lenders.
Lenders that do not update their technology and systems run the risk of experiencing a loss in revenue due to inefficiency and inaccuracy, compliance issues due to outdated technology that is not up to date with the current regulations and expectations and operational risks due to errors and inefficient processes.
To alleviate these issues, commercial lenders need to more effectively manage the entire process across the complete lifecycle of a commercial loan and adopt a true integrated approach to commercial loan management (CLM). Doing soyields numerous benefits, including reduced expensesthrough the elimination of duplicate efforts, improved compliance ratings and lowered examination burdens and ultimately, stronger growth and revenue through the more effective targeting of opportunities and customer satisfaction.
As financial institutions evaluate their commercial lending technology infrastructure,some key elements that make for a truly integrated CLM system and efficiently commercial lending departmentinclude:
- Clear visibility into the loan approval process – both internally and externally;
- A seamless and consistent flow of information extending from origination throughout the life of the loan;
- Configurable levels of flexibility in loan functions for various users (depending on their role, experience level, skill set, etc.);
- The ability to collaborate without the fear of incomplete or outdated source information;
- Capability for regulatory compliance and other internal policies to be consistently enforced across the enterprise; and
- Removal of paper from the process wherever possible.
All financial institutions have unique credit policies and risk appetites. In addition, lending strategies and policies must evolve over time to meet market demands. An effective CLM system should include configurable components driving the policy and rules engine to meet these unique needs.
Traditionalbusiness and commercial lending processes tend to be convoluted, paper intensive and prone to human error, which is not conducive to mitigating risk, driving growth or increasing revenue. The influx of new commercial loan applications, as well as the increased market competition,and the need to mitigate risk meansbanks and credit unions need a lending department with streamlined and efficient technology solutions in place. If technologies and processes are not updated, institutions may miss revenue opportunities due to inefficiency,inaccuracy and unmet customer or member demands. For banks and credit unions with an eye toward controlled, stable growth in 2020, commercial lending can provide that pathway when managed correctly.
Todd Robertson – As Senior Vice President of Business Development, Todd Robertson works with the largest financial institutions and healthcare providers in the United States to demonstrate how ARGO solutions can transform customer experiences and improve operational efficiency. When Robertson joined ARGO in 1994, he worked as a developer and project manager before moving into his current business development role. Before starting his career, Robertson served in the United States Air Force as an air traffic controller.
A native of Lubbock, Texas, Robertson graduated from Texas Tech University with a Bachelor of Business Administration in Management Information Systems. He and his wife, Laura, live in Richardson, TX where they are raising four children. The family enjoys skiing, golfing, and traveling.