By Neill LeCorgne, VP Banking at Sageworks
Today's small business loan renewal process takes too long, costs too much and results in lower client satisfaction. This is not a winning approach in an increasingly competitive future. In fact, those that maintain the status quo will miss earnings growth as clients move their business relationship, including critical core deposits and fees, to an institution that can renew their loan fast and easy and with no credit interruption.
Technology adds significant workflow efficiency gains and a reduction in labor investment to the process of renewing performing small business loans. Incorporating technology to shrink the labor- and paper-intensive steps in a loan renewal process can reduce the labor investment per loan by more than 90%, or $2,159.
Multiply this by the number of renewals a bank does each year and the magnitude of opportunity for earnings and efficiency gains is staggering.
Most bankers would agree that a small business loan with a satisfactory repayment history, no major change in market economic conditions and strong financial performance shouldn't require the same underwriting process as an entirely new loan. Financial institutions should be able to efficiently and appropriately underwrite the renewal utilizing a uniform and short-form process unless a borrower's payment history, financial ability to pay or any other easily recognizable weakness has occurred. It is also logical that any loan up for renewal that has well-defined weaknesses should be underwritten based on a longer and more traditional in-depth underwriting process; managing risk becomes more of a focal point.
Despite these logical differences in how various renewals should be processed, many financial institutions follow for each loan the same labor–intensive process they use to approve and close a new small business loan.
Inconsistent process creates inefficiencies
Many institutions have complicated and inefficient processes to manage small business loan renewals. Some have implemented a short form loan process to manage small business loan renewals. However, commonly these short form process changes don't go far enough and the institution often falls back into the trap of performing steps that mirror a traditional original loan approval process.
Loan renewal processes are commonly found to be inefficient, unstructured and inconsistent across an institution, particularly where the institution has multiple markets and lending teams spread widely over a geographical region. Labor and its associated costs are the primary issue preventing many institutions from an efficient renewal process. As an example, commercial lenders invest hours in visiting clients to gather required loan information. They spend hours evaluating and populating information for a credit memo. Further, a common pet peeve of a commercial lender is spending hours researching deposit, loan and fee information related to a loan relationship for the credit memo. Similarly, credit analysts spend considerable time keystroking and identifying double entry adjustments related to updated financials for borrowing relationships which may have multiple businesses, individuals and affiliated limited liability entities. They also spend time researching and gathering third party information for the renewal including pulling information from credit bureaus.
Virtually all of these labor-intensive steps and investment of time can be replaced by technology. Technology-based workflows bring efficiency, structure and uniformity to the loan renewal process. Institutions have the ability to configure and customize a loan renewal workflow to incorporate the uniqueness of the institution and its staff. The technology-based workflow establishes phases and steps a loan goes through at an institution. Once this workflow is developed,it becomes the engine that supports the sequencing and efficiency of the loan renewal process. This smart technology-based workflow runs automatically in the background of the loan renewal and can be adapted with pre-determined events and dynamic changes, as a specific loan process may need to change. Not every loan starts a workflow and is completed exactly in the same manner. However, an efficient and effective loan renewal workflow will more often follow the same process track.
Institutions looking for the limited number of significant opportunities for earnings and efficiency gains in lending should be sure to note the opportunity provided by bringing automation into the loan renewal process. Through a combination of the use of new technology and a centralized small business lending portfolio team that includes dedicated portfolio managers and credit analysts, financial institutions have the potential to reduce labor investment by 90 percent, or roughly a cost reduction of $2,159 loan. In making renewals more efficient, they will also serve borrowers better and faster.
Neill LeCorgne is Vice President of Banking at Sageworks, a financial information company that offers lending, credit risk and portfolio risk solutions to over 1,300 financial institutions. He is responsible for working with financial institutions to enhance their operating strategies including improving efficiency in the lending process. Neill has over thirty-three years of experience in the financial industry including eleven years as President and Director of a multi-bank holding company in the state of Florida, seven years as manager of a corporate banking team at a super-regional bank and fifteen years serving financial institutions as Director of Business Development for the Federal Home Loan Banks of Atlanta and Seattle.