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Deepening Business Relationships Through Payments

By Melissa Giddens, CTP, AAP NCP, SVP, Consulting Business Leader, WesPay Advisors

Most businesses have a need for financial services above and beyond a loan and basic deposit account. Whether the business’ need is online and mobile banking or extends to ACH or wire payment origination services, businesses of all sizes are placing greater importance on the ability to maximize payables and receivables, mitigate the risk of fraud, and leverage information to make cash flow decisions. Credit unions need to have the resources and skills required to help their business members thrive.

Offering payment solutions can help meet the needs of business members, but also generate non-interest income for a credit union. Businesses pay for value perceived, therefore charging a fair and competitive price for payment services can help a credit union serve its field of membership and cover the costs for providing the services. Meeting the needs of businesses from a payments perspective can contribute toward retaining existing relationships, winning new business and creating a ‘stickiness factor’ that lends itself toward long-term, satisfied business members. It’s a win-win situation for a credit union.

Below are a few tips to keep in mind when working with businesses:

  • Lead with a conversation. Make it your mission to learn as much as you can about a business prospect before discussing your product offering. Talk to them about their business and make the focus all about them. Ask them how their current account and service structure is working, what efficiencies would benefit them, if their clients are requesting new payment options, etc. Taking the time to understand what’s working and what needs to be improved upon with their current provider can provide invaluable insight into how your credit union could meet those needs before ever mentioning a single product.
  • Drill into their payments needs. Get the prospect talking. Ask a wealth of questions to understand how they are utilizing payments in their business. How are they managing payroll, vendor payments, employee reimbursements, etc.? Conversely, how are they being paid from their clients? And, keep drilling down. If they receive a healthy number of checks, how are they depositing those checks into their account? Are they going into a branch, using a courier, leveraging remote deposit, etc.? And, are they receiving the information they need to reconcile transactions, manage their cash flow, etc.? What type of reporting do they need? Are they concerned about fraud? The more you understand a business prospect’s payments needs, the better positioned you’ll be when delivering a tailored proposal and ultimately, servicing the relationship.
  • Become a trusted advisor. Relationships with businesses extend beyond the services a credit union provides. Continually look for ways to add value for your member. Share an article on fraud prevention that may be meaningful for them along with a personalized note, send industry updates that pertain to past conversations you’ve had with them, etc. Let them know you’re thinking of them and keeping them in mind as you come across new information or resources. Create an environment where they look to you as their financial resource.
  • Do your homework. Research your prospect to understand their line of business, key company leadership, new initiatives they’re tackling, recent awards they’ve won, etc. and comment on what you’ve learned during meetings. Congratulate them on a new product they’ve launched or an industry award they’ve earned. Demonstrate that you’re prepared and that you’ve done your research. Prospects can tell when a potential provider shows up unprepared, so don’t give them a reason to question whether or not your credit union is the right fit for them.
  • Master the little things. Follow up timely. Do what you say you’re going to do. Send thank you notes or emails. Write down important takeaways you hear during the discussion, such as birthdays, a dream vacation they’re about to take, etc., so you can send them an annual birthday card or ask them how their trip went during your next conversation. Servicing businesses starts with building a relationship with the people you’re interacting with, so going the extra mile to demonstrate you were listening goes a long way toward building trust.

Working with businesses is an exciting opportunity for a credit union, as a business’ needs are continually evolving. Businesses look for a true financial partner to guide them through the changing financial landscape and how new products coming to market, regulatory changes, economic considerations, etc. may impact their organizations. When it comes to payments, selling solutions to businesses provides another opportunity for credit unions to shine in servicing the needs of its communities.

Melissa Giddens is the SVP, Consulting Business Leader for WesPay Advisors, a consultancy helping organizations advance their development and deployment of electronic payments. Prior to joining WesPay Advisors, Melissa worked with businesses for over 21 years to help build optimal structures for managing payables and receivables, mitigating the risk of fraud and maximizing cash flow. In 2016, she won the Frank E. Zima Payments Advocacy Award and has won numerous sales awards throughout her career. Melissa earned her Master of Business Administration from Green Mountain College. She holds the Certified Treasury Professional (CTP), Accredited ACH Professional (AAP) and National Check Professional (NCP) designations. Contact Melissa at mgiddens@wespayadvisors.com or 415-373-1180.

Lending on Real Estate Collateral

By Nick Reynolds, VP/Credit Services Manager

The risks associated with business lending differ significantly from those associated with traditional consumer lending. While consumer information is still an important part of knowing your member, the types of risks associated with commercial loans tend to be more varied and wider in scope. This article is one in a series to help credit unions more clearly understand some of the unique risks of business lending.

If you are a fan of the 1993 Steven Spielberg movie Jurassic Park, you may recall the memorable words of Dr. Ian Malcolm (as played by Jeff Goldblum): “Your scientists were so preoccupied with whether or not they could that they didn’t stop to think if they should.”

So it goes with real estate lending. Huge swings in commercial and multi-family real estate valuations since the financial crisis have rightfully given lenders pause (Fig. 1). Historically, the NCUA has authorized credit unions to lend up to a maximum 80% advance rate on commercial real estate. Recent changes to NCUA’s regulations have removed this prescriptive limit, but it still begs the question of whether you should consider going to 80% loan-to-value (LTV), or even higher, on a particular request.

One question I often receive is: Why is an 80% LTV ratio considered the industry standard for determining adequate collateral coverage? One way to look at this is that 80% represents the breakeven ratio on a typical commercial property, if it goes to foreclosure. You can estimate approximately 10% of property value will be spent on costs associated with the foreclosure process, including legal expense, carrying costs, any needed property repairs, and professional management. Once you factor in the realtor’s commission and any discount the buyer negotiates because it is a foreclosure, total costs may easily reach 20% of property value.

There are a number of factors you should consider when you look at a real estate property. In order to be competitive with other lenders, you often will need to advance 80% to win a deal. Under many circumstances, this will be fine. But you need to consider a few important aspects before approving the loan.

One key factor is the reliability of the appraisal. A real estate appraisal should include several “comparables” or “comps”—nearby properties that are similar in use, condition, and size to the subject property. The more closely these comps resemble your collateral, the greater your confidence will be in its appraised value. One home among a thousand of similar homes, with close, recent comps, will provide you with a high degree of confidence. On the other hand, your level of confidence will be much lower on a property with no local comps or recent nearby sales. After all, an appraisal is simply an educated opinion of value. Some of those opinions are supported better than others. You should take into account the levels of confidence and potential variability in the value in your advance rate.

Similarly, some properties are inherently more marketable. For example, an apartment building, a tilt up concrete warehouse with office space, and many types of retail locations are of general interest and the pools of potential buyers are large. But certain special-use properties don’t offer that same level of general appeal. Such properties include bowling alleys, car washes, gas stations and convenience stores, hotels, water parks, golf courses, and movie theaters. If the property only serves a single best use, you should consider a lower advance rate, because the pool of potential buyers is quite limited. Combined with the fact that, in a foreclosure scenario, the likelihood is high that local market conditions may not support that type of business in that specific location, you are going into a sale at a disadvantage.

There are other factors that may adversely impact the salability of your collateral. Rural locations often have a more limited market, and a lower advance rate is often warranted. The quality of leases and tenants may also impact the value. If the borrower holds a long term lease to a single tenant, the performance of that tenant has an outsized influence on property cash flows, and you may wish to reduce your advance rate. Also, if the current leases are below the market rate the appraiser used, you would want to reduce the advance rate.

Lastly, make sure to consider local economic and business conditions. Some markets, including major metropolitan areas and popular tourist destinations, tend to see much greater volatility in real estate prices than other, more stable areas. If you lend in an area that sees such high fluctuations in property values, consider using a lower standard advance rate than 80%.

Remember that your personal familiarity with your borrower and the local market are major advantages and should factor strongly in your underwriting decisions.