In discussing strategic objectives with financial institutions across the United States, a common theme that I hear from CEOs and Chief Credit Officers is the need to diversify their loan portfolios so they aren't so concentrated in commercial real estate. And a common solution they are considering is to increase commercial and industrial (C&I) lending.
What is that old saying? …“Easy to say. Hard to do.”
Why is diversifying your loan portfolio difficult? Is it because businesses in your area don’t need working capital financing to help them thrive and create employment? I doubt that.
Maybe it’s because there is a “fear factor” at your FI of lending against the working assets of a business. Didn’t we all learn early in our careers that loans made to businesses secured by accounts receivable and inventory are somehow much riskier credits than loans secured by real estate? Sure, but we also learned that the only thing that can repay a loan is cash. Working capital assets can convert to cash quickly and be used to repay business loans if your FI has a reliable way to monitor collateral values and control risk.
Hmm, if only technology could provide a solution …
A few years ago, I was planning a business trip to visit some client banks in Illinois. Having never been to these particular cities and towns, I spent some time before the trip printing out pages and pages of driving instructions from MapQuest. These sheets of critical information were bulky and hard to manage as I was driving down unfamiliar roads. Needless to say, I missed a few turns along the way and came across some traffic jams that were not mentioned on the printouts. Jump to today, and GPS technology built into smartphones has made a very manual and unreliable process so much easier to navigate. I can even be alerted to changes in traffic and navigate around developing problems based on real time information.
A careful reader may have already connected the dots from this analogy to lending on the working assets of a business. Is your FI still using manually calculated borrowing base certificates to help maintain the proper balance between credit exposure and collateral values on A/R and Inventory based lines of credit? Well, I’m afraid that’s like using printed directions when GPS is available. Consider the time and effort your borrowers have to put into properly compiling and transmitting the required monthly reporting to your FI. Also consider whether your lenders are doing a thorough job of reviewing the data and analyzing and understanding developing trends that may increase credit risk.
If your FI wants to diversify lending activities and do it the right way, there is technology available from ProfitStars to help remove the fear of working capital lending. Technology solutions need to begin with making the commercial lending experience easy to use for your borrower. Securely uploading data directly from existing accounting systems at businesses and not rekeying or duplicating information is critical to that experience. Just as important is the need for the technology to analyze that data and inform the FI of critical changes and developing trends and to inform the lender of these changes in an easy-to-read and understand dashboard. This not only protects the FI from undo credit risk, but allows the lender to be in a much stronger position to act as a trusted advisor to the borrower by seeing financial needs develop as the business changes with the marketplace and to offer solutions that other lenders miss.
Diversification is an obvious risk mitigation technique in the financial marketplace. The right way to diversify your lending is to use technology to make it easier to understand your collateral position and let your FI provide the most capital available to your business client while maintaining proper credit controls.Now pardon me while I take some more paper to the recycle bin.