James Walter, CEO of BBC Easy and Corey Ross, Vice President of Sales at BBC Easy, contributed this article to BusinessNewsDaily's Expert Voices: Op-Ed & Insights.
In a recent report by Pepperdine University's Graziadio School of Business and Management and the Dun & Bradstreet Credibility Corp., it was reported that the loan success rate dropped from 45 percent in the first quarter of 2012 to 40 percent in the fourth quarter of 2012, and half of the survey's respondents claimed that the current business financing environment is restricting their ability to hire new employees. This is not good news for an economy still in recovery with a 7.7 percent unemployment rate. On top of that, of the loans that areaccepted, it typically takes between 40-60 days for approval and processing. What is the cause for this decline and why, when the absolute dollar amount of commercial and industrial (C&I) lending is rising, are less than half of businesses being accepted for loans?
At least part of the answer lies with the bank lending process itself and the differing objectives of a bank's lending and credit departments. A bank's loan officers are charged with finding and securing business loans while a bank's credit officers are charged with verifying a business's creditworthiness. This push-pull is a good system of checks and balances, but if the lending department is closing new deals at a faster rate than credit can process, a backlog forms and the whole ship slows down. This is particularly true for community banks — where C&I lending grew about 2 percent last year, according to American Banker.
Lending officers not only look at a business's assets, financial reserves, collateral, cash flow and track record, but also look at the business owner's ability to manage a successful business and the potential of that business owner and his/her business to facilitate further opportunities for the bank. Therefore, the lending officer is not only evaluating a business loan, but is looking to establish a long-term relationship with the business owner, which entails additional time outlays. In fact, some community banking thought leaders say that relationship building is as important as ever, even in the age of e-mail and high-tech. We don't disagree — it's important that whatever technological advancements financial institutions put into place, banks and credit unions focus these efficiency gains into maintaining and extending their community outreach.
On the other hand, a credit officer generally has explicit guidelines to follow and utilizes a rigorous risk-rating methodology that incorporates the probability of default and loss in the case of default. Additionally, underwriting methodologies are often tied to risk-rating methodologies. This standardization, while needed to meet federal financial regulations, often means many businesses are overlooked, and a business' "story" of why it deserves funding doesn't make it past the lending department. Considering that complex lending documentation is often re-entered manually by the credit officer and also that according to the bankers we speak to that up to 90 percent of loans are not regularly monitored, and you begin to understand why lending success rates are decreasing even as volume continues to rise. So what's a solution?
In today's competitive C&I lending environment, small banks and credit unions must establish new core capabilities and technology to facilitate lending. The lending and credit departments need to be on the same page — and this can be facilitated by simply having the same information available across a bank's entire network, eliminating the possibility for human error. Automating the lending process can not only reduce the business owner's time to input financial, inventory and tax information, it can also greatly reduce the time needed to produce loan documentation and credit evaluation. Automating the loan documentation process eases the need for the business owner's to fill out multiple documentation with similar information by hand, gives loan officers the time they need to establish more and better customer relationships and provides the control and oversight to give the credit officer real time information to quickly and accurately evaluate performance and trends.
The views expressed are those of the author and do not necessarily reflect the views of the publisher.