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Roughly 23 million small businesses operate in the US, and more than 80% use credit, according to the Small Business Administration (SBA). They most often use credit cards, credit lines, and vehicle loans. Commercial banks are the primary supplier. Credit unions can capitalize on this opportunity by properly assessing their market and selecting the right approach to serve member-owned businesses. The timing couldn't be better for more credit unions to venture into business lending. Bank mergers, out-of-state credit decisions, and a craving for more personal service compel many entrepreneurs to widen their funding search. Yet, fewer than 2,000 credit unions are active business lenders, says the National Credit Union Administration (NCUA). Before getting started, ask yourself some questions, advises Rod Foster, CEO of Covarity in Kitchener, Ontario, an alliance provider for CUNA Strategic Services. Covarity offers commercial loan monitoring software solutions. Foster says ask: 1. What market will you serve?, 2. Who are your competitors?, and 3. What skills do you need?

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It's 2005. Do you know where your member business owners are? Do you know who they are and where they go for financial services?

Roughly 23 million small businesses operate in the U.S., and more than 80% use credit, according to the Small Business Administration (SBA). They most often use credit cards, credit lines, and vehicle loans. Commercial banks are the primary supplier.

Credit unions can capitalize on this opportunity by properly assessing their market and selecting the right approach to serve member-owned businesses.

The timing couldn't be better for more credit unions to venture into business lending. Bank mergers, out-of-state credit decisions, and a craving for more personal service compel many entrepreneurs to widen their funding search. Yet, fewer than 2,000 credit unions are active business lenders, says the National Credit Union Administration (NCUA).

Serving small businesses is more than an opportunity. It could be a matter of member retention. "Credit unions can't continue to ignore this segment because they risk losing the entire financial relationship," says Barry Sloane, chairman/CEO of Newtek Business Services, New York, a CUNA Strategic Services provider offering business services and back-office financial products.

"Create a compelling reason for your members to come back" to combat this erosion, advises Bert Bryan, president of CU Business Capital, a credit union service organization (CUSO) of the $1.8 billion asset Eastern Financial Florida Credit Union. Both organizations are based in Miramar, Fla.

A member business loan normally includes any loan, credit line, or letter of credit (including any unfunded commitments) where the borrower uses the proceeds for commercial, corporate, or agricultural endeavors, or supplementary investment properties or undertakings. Complementary business services cover a broad range-cards (credit, debit, gift, and loyalty); checking, savings, and payroll accounts; processing services, including automated clearinghouse; and e-commerce.

Build your strategy

Before getting started, ask yourself some questions, advises Rod Foster, CEO of Covarity in Kitchener, Ontario, an alliance provider for CUNA Strategic Services. Covarity offers commercial loan monitoring software solutions. Ask:

* What market will you serve?

* Who are your competitors?

* What skills do you need?

"Target your market," advises Jeff Stone, executive vice president of member business services for North Island Credit Union, San Diego, with assets of $1.5 billion. "Decide how deep you can get and how to get there."

Also evaluate the need and whether you can meet it, notes Mark Johnson, executive vice president at Evangelical Christian Credit Union, Brea, Calif., with assets of $686 million. "We saw faith-based organizations were vastly underserved. We knew we could meet that need," he adds.

Evangelical Christian will fund $700 million in faith-based loans this year. These loans to churches, Christian schools, and ministries cover costs from small renovations to multimillion-dollar construction projects. For example, Evangelical Christian provides loans and other services to the Joni and Friends ministry, Agoura Hills, Calif., an organization dedicated to meeting the physical, emotional, and spiritual needs of people affected by disability.

"Commitment, resources, and personal touch have been the hallmarks of our relationship with the credit union. We now have a home for our ministry, thanks to the credit union's diligence and determination," says Billy Burnett, vice president of administration and finance for Joni and Friends.

Market research is one tool to determine target markets, says Mike Hearne, president/CEO of $306 million asset Lafayette Federal Credit Union, Kensington, Md. Hearne and some of his colleagues were SBA administrators. They knew what they were getting into when they launched the credit union's program in fourth-quarter 2004. "It was pretty easy to move into commercial lending," he says.

If your credit union isn't as fortunate, a market study can be instrumental in setting up a strategic plan.

"A market study of your competition combined with an assessment of membership needs is critical," says Doug Benzine, vice president of advisory services for the Credit Union National Association (CUNA). "You need to measure the opportunity within your current and potential membership. It's key to know what business services are offered in your marketplace and who uses them, so your credit union can develop a plan that differentiates its services."

CUNA member business services offers consulting services and customized surveys that identify local small-business owners' needs within a credit union's field of membership. "We provide assistance in setting up their programs and have been helping credit unions for three years," Benzine says.

Lafayette Federal focuses on $1 million to $2 million real estate deals involving investor properties rather than owner-occupied ventures.

"If a small-business loan defaults, you could end up owning that business," Hearne says. "Whereas, if investor-owned property defaults, you own that property. I could live with that."

Putting the plan together requires selling business lending to your board. Lafayette Federal built a spreadsheet model with many assumptions, including volume, aver- age loan size, underwriting cost, and best- and worst-case scenarios, Hearne explains.

In your board presentation, cover member benefits, potential new business, and an industry perspective (including SBA and Census Bureau statistics) so directors can comprehend market positioning, emphasizes Bryan.

"A plan creates boundaries, keeps you from overspending, and gives you a roadmap so you don't end up somewhere else," he adds.

Your plan also should identify risks of offering member business services and how your program will address them. When NCUA examiners evaluate credit unions, they focus on risk guidelines. Risk management is "the key determinant in reviewing member business lending," says Cherie Umbel, NCUA information specialist.

Other areas to consider for your business loan policy are loan authority and accountability, appraisal requirements, environmental assessment, and a loan grading system ("Prepare for your exams," p. 79).

Take care of business

Putting a plan into play requires attention to detail. "Credit unions have realized extraordinarily high scores for how they serve members, so they want to be sure they have the best people, best technology, and best products," Sloane says.

CUNA member business services offers educational materials for credit unions to let members know they can address their small-business needs. Specialized training is available for staff through CUNA's center for professional development.

Johnson suggests covering these areas when executing a business services plan:

* Acquire staff. Some will come from within your credit union and some from outside (with a commercial lending background) to work in administration, underwriting, servicing, and collection.

* Develop specialized products. Evangelical Christian tailored accounts for organizations' new building funds.

* Identify the right structure. Evangelical Christian looks different today than it did as a consumer loan-oriented organization, says Johnson, in terms of systems, processing, and technology.

* Obtain the right systems. "Technology isn't the answer," Johnson says. "But it's a huge factor." Evangelical Christian, which processes its loans in-house, brought in a relational core data processing and enterprise system from Open Solutions, Glastonbury, Conn. "For us, that was a big piece of it."

It's important to North Island as well. "In a business environment, you need batch processing. Many credit unions can't handle that," says Bob Reck, first vice president of commercial services and corporate development for North Island, also an Open Solutions client.

North Island offers its members business checking, savings, and financing. The credit union's member business deposits have grown to $72 million. It also purchases loans from other credit unions. "The loan portfolio has been somewhat static," says Stone, "but the loans under management continue to grow."

"We started as a purchaser of services and progressed to an originator," Reck says. The credit union's solid technological infrastructure enabled that jump.

Be careful, however. "Computer systems tailored for credit unions sometimes aren't designed for commercial lending and business services," says Warren Cole, lending products manager, delivery systems, for Harland Financial Solutions, Portland, Ore. "You can't assume your current system will fit."

Harland Financial Solutions offers options, such as Laser Pro, a compliant commercial lending solution, and the ULTRADATA System, a host processing solution with member business services options. Laser Pro is part of an alliance relationship with CUNA Strategic Services.

Opinions vary in the industry as to whether to offer business lending or depository services first. There's agreement, however, that both are necessary for a workable member business program.

"They need the deposit side first to bring in the entire relationship," maintains Stacie Leake, senior vice president/chief operating officer for Members Business Services, a CUSO in San Bernardino, Calif. "It's difficult for a credit union that doesn't have the deposit side to retain a business's entire relationship."

Hearne sees it differently. "You start with loans, and everything else will be apparent thereafter." But, he adds, "if you do nothing but offer loans, your members will end up going to the competition because small businesses need more than loans."

"Our desire is to be driven by relationships rather than by products," says Johnson. At Evangelical Christian, business deposits and other services reside closely with business lending.

Then there's the practical side of the ledger. "The deposit side is more profitable than the lending side. You have far more business depositors than borrowers," notes Bryan.

It all comes back to the member relationship. "The deposit side drives so much of what we do," adds Stone.

Consider CUSOs

There are numerous ways to implement a member business services program, advises Leake. They include:

* Creating an in-house proprietary program to handle business loans. "The biggest risk is not understanding the true expense of building it yourself," says Leake. That involves bringing in a system, hiring people to run it, and creating policies and procedures to support it.

* Outsourcing business loans to a third party for a referral fee.

* Joining a CUSO. You get to market more quickly and most cost-effectively. Plus, you can tap into the CUSO's expertise.

If your credit union has less than $1 million in assets, a CUSO is a necessity, says Hearne. In general, start-up costs run from $300,000 to $500,000, which covers the outlay of importing people and technology.

A CUSO can provide a broader product offering than many credit unions can support on their own. "The area of member business lending is very diverse," explains Jean Faenza, president/ CEO of Business Partners LLC, a CUSO based in Chatsworth, Calif. "It's difficult and expensive to offer a range of products and serviees. Partnering with the right CUSO allows a credit union to focus on building business relationships and not worrying about the time and expense it takes to build the infrastructure to support a complete and comprehensive program." Business Partners has a marketing agreement with CUNA.

"We offer a foil-service program," Leake says. This includes working with credit unions to fine-tune their strategies and market direction; set up policies, procedures, parameters, and training; and hire staff.

Some credit unions create or join CUSOs to share the expense. That was the impetus behind Business Lending Group, a joint venture among four Wisconsin credit unions-Fox Communities and Prospera in Appleton; CitizensFirst, Oshkosh; and Pioneer, Green Bay.

Together, these institutions represent more than $1 billion in assets and more than 130,000 members. The CUSO evolved in 1999 when business lending was a new concern. "They weren't sure what their portfolio appetite for risk was," says David Coggins, president of the Appleton-based CUSO. "They came to the conclusion that 'we would risk a lot less if we do it together."'

Business Lending Services LLC, a new joint venture of Business Lending Group and Corporate Central Credit Union, Muskego, Wis., has emerged to help other credit unions get into business lending. "It's a turnkey operation for business loans," explains Coggins. Credit unions can get into business lending minus the startup challenges and have immediately at hand experienced loan capabilities, added clout, more risk mitigation, and cost-sharing.

For that reason, using a CUSO is a safer way to start serving member businesses, Bryan suggests.

CUSOs also benefit from economies of scale. CU Business Capital offers business lending and services including payment options through Newtek Merchant Services, and a cash commercial account analysis through The Weiland Financial Group, Lake Bluff, Ill.

"From a business lending standpoint, CUSOs present a wonderful way to get started because a lot of experience and expertise are required," Cole says.

Business lending provides a balance in the credit union's loan portfolio. Most important, the prospects are out there. "For most credit unions," says Foster, "there's more opportunity than they realize."

Even prospects present challenges. "The biggest danger is that we live in an opportunity-rich environment. Everything looks good," says Johnson. "Our challenge is to say no to more things than to say yes to everything."

"I just hope credit unions are careful," suggests Leake, "to put together a well-thought-out plan and stay committed to the course."

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