June 12, 2012
It seems like just yesterday, but 2012 marks the 10th year that CUES has sponsored the CUES School of Business Lending. As the old story goes, time flies!
Over the last 10 years, member business services/member business lending has become an increasing significant business line for more than 2,000 U.S. credit unions. A significant push is currently underway to get Congress to agree to allow credit unions to increase the relative relationship between member business loans and total assets. The proposed ceiling is 27.5 percent of total assets, more than double the current limit.
Assuming the opportunity to grow the MBL portfolio will happen, here are some thoughts to keep in mind so you adequately manage that growth potential.
The goal with every business loan decision is to create a working credit relationship with a borrower you are confident has the ability to repay the loan. We tell our students in the CUES School of Business Lending that to become a great lender, you have to become a business model structure expert.
Business model structure creates operating cash flow. Operating cash flow repays loans. Operating cash flow is the life blood of small businesses.
Fundamentally lenders should never loan money to a business if they don’t clearly understand the structure of the business model. The structure dictates the operational ability to repay.
Ironically, many profitable small businesses struggle with operating cash flow. Often this dilemma is rooted in the background and experience of the small business owner.
Small business owners tend to generate their business management experience on the job. Most learn a unique skill set or develop a product or service they believe they can sell themselves. Working for themselves is believed to be a better working environment than working for someone else.
This entrepreneurial spirit takes hold and off to the races they go. Early on they find that creating sales volume requires assets. Acquiring assets in turn requires capital.
Most small business owners start out with very limited equity capital. They hope to be able to borrow the capital they need from a lender. Most of these owners could tell you very vividly what their first experiences were like as they walked into a financial institution with the intent to borrow money for their business.
Some will tell you they felt like they were on trial throughout the process and many heard the term “No” several times before they finally found someone willing to work with them.
In the last 35 years, we at Hipereon Inc., Seattle, have had the opportunity to work with literally thousands of small business owners in markets throughout the country. Our objective through the training and consulting services we have provided has been to arm them with a fundamentally sound understanding of their business model structure.
Few of these business owners were CPAs or MBAs. Their MO is to get to work early and leave late. They discover that the harder they work, the luckier they tend to get. In fact, working a little harder seems to be the default strategic action plan of choice in almost every situation.
Is working harder always the right answer? What can you, the credit union, do to help?
Top Small Business Challenge: Asset Accumulation
Our experience tells us that small business owners tend to be asset gatherers/accumulators. Many acquire assets because of the related tax deductions they get up front. Ironically the move to expand their business asset base to generate tax deductions comes back to bite them.
Asset acquisitions represent intentional decisions to house cash. They literally absorb the precious liquidity of the business. The ramification is an asset-rich, cash-poor business.
So what do those decisions to acquire additional assets to create new tax deductions ultimately generate?
- The business becomes illiquid. Cash is housed in the asset base and not in the check book.
- The business becomes insolvent. Not paying your bills on time can be one of the quickest ways to business failure.
- The business needs more debt. Acquiring more assets means borrowing more money most of the time.
- More debt means more carrying costs for capital and a need for adequate levels of operating cash flow to service the debt. Will the real owner of the business please stand up?
- More carrying costs reduce profitability. Less profitable, less credit worthy.
- Poor operating cash flow and lower profitability leads to reduced business value.
Accumulating assets should not be the primary business objective. Creating a predictably profitable business with positive operating cash flow should be the operating business plan end game that every small business owner has in mind.
One of the primary goals for every small business owner should be to build a measurably valuable business that can be sold for multiples of what it earns.
Easy to say when you say it fast. To pull it off, a business owner has to become a business model structure expert.
Credit Union as a Resource
So, where do small business owners go to gain more insight about the chemistry of their business model structure? Do they come to see you at your credit union because they know you understand business and, better yet, their particular business?
What are you doing to help educate your business members? Can they learn to make better business financial management decisions as a result of working with you?
Step back and revisit your value proposition. What attracts small business owners to your credit union?
Being nicer, easier and cheaper are not sustainable relationship management strategies. To be sustainable you have to offer products and services that are as good as, or better than, what isavailable from the competition.
Can you help your business members build a valuable business? Are you a business model structure expert?
Jim Devine is founder, chairman and CEO of Hipereon Inc., Seattle, an instructor for the CUES School of Business Lending™ and a trainer for financial institution regulators.