Ask the Experts: Commercial Lending
In this series, we take a look at the inner workings of the Credit Union and meet some of the champions who help our members in every facet of their financial lives. This month, we met up with expert William Mello, who has brought an industry’s worth of experience to American Heritage’s business lending teams.
William Mello has spent most of his career in business lending; over the last 20 years, after interning in college he has worked at HSBC Bank, Citizens Bank, and Santander Bank. The first 10 years of his career were in consumer lending, while the last 10 have been in different phases of commercial banking. He has worked with small businesses, mid-market, and C&I lending. At American Heritage, William oversees the commercial lending department: both back office underwriting service and portfolio, as well as the lending team.
What does the commercial lending market look like right now? How are the rates in comparison to the past?
What types of fraud do business owners need to be aware of?
How has COVID impacted commercial lending and the businesses you work with? How does it relate to consumer lending?
The CARES Act and Paycheck Protection Program (PPP), through the Small Business Association (SBA), allowed small businesses to apply for assistance with lost income. There were two phases of the PPP, and we are currently in the forgiveness phase. In 2020, American Heritage funded more PPP loans than any other credit union in the region. This allowed businesses to make up for lost income or wages and allowed the economy to thrive and let businesses reopen cautiously.
What is the latest update with Paycheck Protection Program (PPP) loan forgiveness?
On August 4, 2021, the SBA rolled out PPP forgiveness portal, which was an online method to upload your documents for forgiveness for processing for loans up to $150,000. Any loans over that amount must go through their financial institution.
Most of the loans American Heritage processed were below that $150,000 threshold, from very small businesses that needed help. The portal allowed these businesses to work directly with the Small Business Association for forgiveness.
Many business owners were anxious to move forward with the process. Our team called each business member borrower and personally walked them through the process for forgiveness, likely the reason why most of the loans resolved quickly. While we cannot predict the future, the forgiveness process is ongoing and will remain steady.
Based on the last year, what advice would you give a small business owner?
One piece of advice William has lived by for the last ten years of his career: have a passion for your business and love what you do, as that is genuinely is half the battle.
Additionally, he believes all business owners should work through and prepare a business plan, partner with a financial institution, a CPA, and a lawyer. You must partner to protect yourself.
In the last year specifically, the best piece of advice is “slow and steady” because of the uncertainty of what the future holds. Avoid big purchases, borrowing for expansions, and spending the money in the bank, with the external rapidly changing environment, inflation, and general supply chain uncertainty. Pause and think through, like what we are doing as consumers.
Take a conservative approach in your decisions; take fewer risks. There has been a dramatic shift where things are changing much more quickly.
What unique challenges, if any, does commercial lending face?
The biggest challenge is assessing risk. Things are going so well right now, with low rates and properties available at a good cost, being able to determine the risks we’re engaging with in terms of business loans is key. Ensuring that the property condition and environmental reporting is favorable, performing tenant analysis, and checking vacancy rates. Based on our portfolio, this process is going well, but we must be forward-thinking.
Current reports say that office complexes are stable, but warehouses are trending. Pivoting our lending towards warehouses and flex buildings (which are combination offices plus warehouses) could help future business owners. A lot of construction today is storage and not retail.
Why do you like working with business owners?
William says that this is the best part of his job, the thing he enjoys most. He believes the team at American Heritage excels at getting to know and understand business owners and their needs. He loves to talk to business owners because they are incredible people to get to know and hear why they do what they do. The individual history and stories allow him to personally learn a lot from them.
This exchange ends in mutual respect that lasts many years. He admires their incredible work ethic, as being a business owner is not a 9-to-5 but 24-hour job. It is most rewarding to “interview” them and understand how they started, what their evolution has been, and their failures and successes.
What advice would you give business owners applying for these loans to make approvals more successful?
1. Be organized in your financial analytics: tax returns, business plan, and again, have a CPA. Understand how the business performs financially and be able to articulate this to your lender. Being disorganized or keeping your documents in parts reflects on the business and how it performs.
2. Be up front and have the difficult conversations around risk and potential pitfalls that could be mitigated by other factors. You want to be honest with where you see your business going, good and bad, since things are never perfect.
Your contact at American Heritage understanding your situation allows them to be a spokesperson for you so they can advocate for you and why they believe in your business. Two-way, candid communication is important.
Is it valuable to ask, “Why did my business get denied?”
Absolutely, because "no" now doesn’t necessarily mean "no" forever. Credit is not that complicated – lenders look at if you can afford a payment, the history on your credit report, and that the collateral covers the loan amount. This lending process is the same everywhere. When one of those elements doesn’t work out, don’t forget that they can be changed for the future.
Potential borrowers need to know how a lender qualifies. Additionally, the lending team needs to be candid about what the issue is, and sometimes after these conversations, some decisions have actually been overturned due to a deeper understanding of past financial information. The more knowledge the potential borrower has for how we evaluate credit, the better we can partner together as a credit union and a community.
How has commercial lending changed in the last five years? How do you expect it to change in the next five?
In terms of the components of commercial lending, there haven’t been any massive changes, but one obvious way is the COVID-19 pandemic, including the CARES Act and PPP loans.
In the next five years, William sees that continuing regardless of COVID. Teams and business owners have learned to work remotely. He expects the commercial and business environment will continue to thrive and people will be more thoughtful in their decisions.
Take a drive through your community. The way we view commercial buildings is beginning to change. Things like medical offices may be smaller, and we’re starting to see this already in new construction. “Plug and play” office structures, where any business can be a doctor’s or lawyer’s office with a simple design change. We’re seeing smaller office spaces, with less retail and more warehouses. There are more trucks on the highway and the bigger buildings are designated for warehouses.
More emphasis on being cost-effective, as a lot of people, if given a choice, would do things remotely. These trends will likely continue, especially with the upcoming generation.
How has commercial lending changed while you’ve been with American Heritage?
William’s focus in the first couple months has been to get to know the team. American Heritage reviews and revises the business lending process to be safer and quicker for the member.
These types of process reviews are still ongoing and will be forever, as is the nature of improvement. Commercial lending is made of many teams, so he wants to think about the business collectively and serve all aspects of the business more cohesively to improve member experience. Enhancing synergy and understanding how each section of the team works together facilitates this.
How are our commercial loan products better than our competitors’?
Due to his history in the banking industry, William has direct experience with the distinct difference between a bank and a credit union. Especially compared to other credit unions, we offer very competitive rates and expanded terms and conditions.
In addition, the amount of time from application to loan completion, which includes appraisal and closing, is generally shorter than our peer group.
What are some things you wish borrowers knew?
We are expanding our commercial and industrial (C&I) lending and are in the process of rolling out an improved loan origination system.
We want to continue to focus on the small and family businesses in the community. Our local branches are going to increase support for the local businesses in the area to provide the loans and education they need.
American Heritage is also expanding its treasury products, or how businesses move money. We are building an online business banking suite which allows a member to move money more safely. If a third party wants to pull money from your account or you want to send money out, you approve it beforehand. This ability to move money with more analytics and dual control (one creates it, one signs off on it) is like writing a check and having someone sign it. Most banks have this service, but not many credit unions do.
What advice would you give a small business owner?
When considering when to take out loans, go through the same thought process as you would when borrowing as a consumer. Consider your options, like what you want to buy versus rent. Understand the loan process, connect with a branch, or get in touch with our Contact Center and get an idea of what services we have.
Engage with your community to get insight from others. LinkedIn is a great place to learn from the experiences and mistakes of others and find your business community based on industry.
At American Heritage, our team advises all potential members and has a responsibility to assist them in making good decisions. We will be right there with you to make sure you understand all terms and conditions and to answer any questions.