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How to Make Good Business Loans in an Economic Downturn

Lender working from home

 

The possibility of a looming credit downturn has been a hot topic in lending for some time now, though no one predicted that a pandemic would be the cause. We can be hopeful about how quickly the economy will bounce back, but the reality is that lending institutions will face challenges while borrowers recover. Lenders will need to be especially mindful to avoid costly mistakes while they do their best to support Main Street, taking into account the three immediate business adjustments outlined below. 

1. Adjust automated decisioning

From alternative lenders to traditional banks, automated decisioning has become more commonplace. In a status quo situation, making a loan to a borrower with a high credit score and plenty of assets without a credit analyst’s review makes sense. However, in a time of crisis a business may look perfect on paper and yet may not currently be open for business. The scorecards and algorithms developed during stable economic times will not apply and lenders could end up with a non-performing loan on their books. Now is the time to either turn off auto approvals or revise and test scorecards and algorithms quickly.

2. Increase fraud awareness 

Economic downturns and an increase in fraud are often found together. Faced with tough and emotional decisions, otherwise honest businesses may be tempted to provide falsified documents to secure a loan or purport to be collecting on outstanding invoices they know won’t be repaid. Lenders need to be extra diligent in verifying information and scrutinize collateral positions while ensuring borrowers are continuing to pay business insurance.

3. Adhere to credit policies

While lenders will be looking for ways to accommodate their current borrowers, they should stick to their credit policies for new loans. The FDIC and other regulatory agencies have provided guidance that reasonable accommodations to existing borrowers will not be scrutinized. However, this does not apply to making loans to new borrowers seeking credit in times of crisis. If lenders vary from their credit policies to make loans to new borrowers, they risk putting themselves in a position that could result in downgraded credits and an increase in non-performing assets or higher credit losses.

Financial institutions have a tough road ahead, but it doesn’t need to include loans that raise an eyebrow as to why they were even originated. With the right adjustments and keeping the foregoing in mind, lenders can continue to provide a valuable service to their communities and maintain an acceptable level of credit risk.

 


 

Ron Meyer is a Senior Business Advisor with Linedata. Experienced as both a bank executive and advisor focused on technology solutions, Ron's unique perspective helps financial institutions learn how to leverage digital tools to bring value in any economic season. Ron can be reached at Ron.Meyer@na.linedata.com.

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