Streamlining commercial lending

When it comes to bringing efficiencies to commercial lending, the words straight-throughprocessing, automation and workflow come to mind. There is an ample supply of software vendors using these buzzwords, and they do it because they are trying to help you with your bottom line. We worry about workflow precisely because commercial credit is expensive and time consuming to process. The workflow for commercial transactions is anything but simple and straight-through, and therein lays the challenge.

Commercial vs. Small Business
Before we get too far, we want to mention that we are speaking of commercial lending here. This is the kind of lending where there are several credit facilities, each with different terms and conditions wrapped up inside a single credit request.

Each request likely has several types of collateral and several guarantors, and commonly the requests need to encompass credit facilities of the related parties and factor in their account relationships. These requests represent fairly large dollar amounts, which require a secondary level of underwriting and review before approval is granted. This business is known as commercial relationship lending and is found in many institutions – from the de novo or start-up to the largest international bank. It contrasts sharply with the transactional lending commonly seen in small-dollar “cookie cutter” loans made to individuals for a business purpose.

In small-dollar transactional lending, the products are virtual commodities. You pull a credit bureau report, assess the score, and consider a few simple rule sets to approve or decline–just like a consumer loan. Borrowers have no negotiating power, and each transaction can be considered independently. This small-dollar standardized workflow can be cast in a straight-through automated process. In relationship lending, the rules and approval will vary depending upon total dollar amount of all the loans in the request, collateral types and credit purpose. For example, real estate collateral requires different handling than equipment, receivables and inventory; construction lending requires different processes than business asset collateral. Commercial loans also require more due diligence than small ticket business loans. Typical due diligence includes: individual credit bureau reports, vendor credit checks, financial statement spreads, independent collateral valuation, specialized collateral filings, competitor peer research and analysis, and so on. With several local businessmen involved in any transaction, word can get around and “arm twisting” over price and terms happens since the overall relationship usually represents a significant revenue opportunity. With commercial credit, the customer has real negotiating power, and your local marketplace reputation is always a serious consideration.

Software Silos
Because commercial credits involve large dollar exposure, institutions exert great care in granting them. Commercial credits traditionally go through the hands of at least six to ten specialized professionals who make use of the same number of specialized software systems. Unfortunately, these systems usually do not share data, are of mixed technology and vintage, and are licensed from different vendors, with each system accessible only to a few identified users. Paper also remains very much a part of these legacy commercial lending practices. Usually it is “passing the file” that triggers the next person to perform their task. It’s not uncommon for some institutions to have a database just to track the location of the file. This who-has-the-file processing is necessarily linear. Renewal commercial credits can easily cost $500 to $1,000 per transaction.

Initial credits, which may require extensive research and a detailed presentation requiring two levels of approval, can cost significantly more and the processing time span can exceed a week.

With costs and service times like this, it’s to be expected that increased scrutiny is placed on the systems and the process.

These segmented and disconnected legacy systems make life difficult for worker and manager alike, and the environment makes staff collaboration nearly impossible. Users can only see their immediate in-basket and the information that resides within the few systems they can access. Usually, each system has its own screens, forms, processes and reports. Specialized software training is usually needed. Workers operating in these situations have little or no ability to preview the incoming work queue and are not well-positioned to help out their peers when a volume crunch hits. A collection of niche software applications rarely lets a manager see the big picture.

A manager’s maxim is “if I can’t see it, I can’t measure it – and if I can’t measure it, I can’t manage it.” Simplify and Unify the Workspace So after examining challenges in the current situation, we now turn to ideas for improving it. The first element to improving your condition comes from taking stock of the situation. You must identify the many roles, processes and systems, and itemize the steps, effort and time spent. Clearly, your goal is to combine the functions into a broadly accessible, unified workspace that includes as many of the functions as possible. A single database is the most desirable so that staff enters the data just once and reuse it thereafter. Redundant data entry is the most common source of errors in credit processing. Another class of errors is missed or overlooked items that can be reduced when two or more eyes can look in on a common task. A unified application workspace also makes entry, retrieval and update of information easy since common commands will be presented in a single user interface. This saves on training, and lets you share the workload across peers. Finally, such an environment allows managers to roll up information for reporting.

Encouraging broad participation is also important, and on today’s network platform that usually means the software should run in a browser. Today’s workgroup is frequently comprised of individuals in several geographic locations. Executives report to us that finding good talent is extremely difficult, and they need to be increasingly flexible in accommodating talent wherever they can find it. Industry trends are only indicating the situation is intensifying. To encourage broad participation, open access to common information should be granted.

Collaboration is Key to Efficiency
With a single database, a unified workspace, and broad participation, the first true collaboration can begin. When we can have more than one person working on a deal (usually working on different aspects) you can start to enjoy some benefits of collaboration. Examples include doubleteaming a rush project, checking in on the status of a deal that will be submitted shortly, or getting a start on document preparation while the deal goes through the final approval steps. In commercial credit processing, a linear process is always less than optimal. Every commercial deal must go through several hands, and few people are standing ready to work on credits the second they hit their desk. Any delay only adds to the final completion time. Concurrent processing provides a way to speed up processing of individual credit deals. Though the final analysis may involve the same individuals and effort (and hence cost), cutting processing increases responsiveness and results in happier customers. You also end up with half as many files open on your desk and experience a reduction in interruptions – interruptions that seem inevitable when urgent deals are taking a long time.

Ban the Paper
Banning paper is easier said than done, especially in the commercial credit functional space where, historically, executives have been entrenched in a highly judgmental analytical environment. Imaging systems have tried to come to the rescue in this area, but paper is still very much a part of the process. There also remains a proliferation of electronic documents in Word® and PDF format, numerous spreadsheet files and a growing mountain of e-mail to supplement the paper. All these items may be significant to the credit or the customer file.

Also, though starting to change, credit request presentations (a.k.a. the credit memo) are still commonly delivered in paper with an archive hard copy retained for audit review. Ironically, the credit memo goes very quickly from electronic, to paper, then scanned back to electronic. Clearly, the more effective workspace will provide appropriate control and access to
information about the credit, and on occasion, to the documents themselves no matter where they reside.

Workflow Links Specialists
The whole notion of workflow comes about as a result of the rise of specialists. The commercial lending businesses require specialists in order to manage risk, keep costs as low as possible, and ensure that proper processes are followed. We all know the diversity of knowledge, skills and abilities necessary for the various roles of staff involved in a single deal.

We need people who can interface with the client and sell; people who can research and analyze; people familiar with documents and compliance; individuals to ensure legal and lending policy is Concurrent processing can halve the time for processing a credit and simplify your workspace, leaving half as many open files on your desk. followed; people skilled at writing presentations; and back-office servicing specialists to ensure all the steps are complete without letting anything drop through the cracks. There is the occasional superstar who is good at everything, but that is rare and an unrealistic way to grow a business. For the rest of us, we need a variety of individuals and we need to link them.

Against this backdrop, we approach commercial credit workflows. The workflow needs to involve all the appropriate stakeholder groups with flexibility because the situation may vary given different types of credit and approval limit requirements. A small-dollar commercial loan to an individual seems simple and the approval steps clear until we learn they are a guarantor on a larger commercial credit. Now, credit policy dictates we consider them part of the overall group credit exposure in the request. If the individual is a Director, the approval path goes quickly to board level – and those meetings are relatively infrequent. In short, workflow requires collaboration, visibility, flexibility and trackability.

The Ongoing Quest
The relatively low transaction volume of commercial credit, its basis in relationship lending and the complexity of the business make it unlikely to be commoditized as consumer, mortgage and standardized small business loans have been. But the care that must be exercised before granting large dollar loans, as well as the necessary involvement of the many specialists, the
processes and the overall costs, all ensure that this area garners continuing scrutiny. Institutions will seek out multiple tools to make people more effective, reduce costs and deliver improved services to meet the growing marketplace expectations.

Harland Financial Solutions is a major provider of software solutions to the financial services marketplace. CreditQuest® is designed for end-to-end commercial lending to manage individual credit and overall relationships, as well as portfolio-level analysis. The system runs on a single database and offers a unified workspace accessed via a browser. Its functionality covers credit origination, approval and renewals, featuring financial statement analysis, user-definable workflows, automated credit memos, graphical ownership trees, ticklers, Exchange® e-mail and calendaring integration, electronic document management, credit bureau reporting, embedded risk models, host integration and extensive reporting. For compliant documents, CreditQuest tightly integrates with LaserPro®, Harland Financial Solutions’ industry-leading documentation system. For additional information, please contact Harland Financial Solutions at 800-815-5592 or moreinfo@harlandfs.com.

Alex McNeily, Senior Credit Product Expert, Harland Financial Solutions
Alex McNeily brings three decades of industry experience to his position as a senior credit product expert at Harland Financial Solutions. In this role, he often presents on Harland Financial Solutions’ software products and frequently speaks about various credit topics, including credit automation, workflow, implementation of new decision technologies and general credit risk assessment management. McNeily has held several positions at Harland Financial Solutions, including management positions in Sales, Marketing and Professional Services. His industry experience includes ten years in commercial lending and twenty years in the software industry.