Regulator Warns Climate Change Poses a Financial Risk

Interviewed June 10, 2019, by the NY Times, Rostin Behnam warned, “If climate change causes more volatile frequent and extreme weather events, you’re going to have a scenario where these large providers of financial products – mortgages, home insurance, pensions – cannot shift risk away from their portfolios.  It’s abundantly clear that climate change poses financial risk to the stability of the financial system.)  Mr. Behnam is one of the five members of the Commodity Futures Trading Commission.

This isn’t the first call to action.  The Securities and Exchange Commission began requiring public corporations to disclose bottom-line risks associated with climate change way back in 2010.  More recently, an international coalition of 39 central banks began studying the effects of climate change on financial markets. 

While the risks posed by natural disasters cannot be avoided, as Mr. Behnam points out, the tools are now available to quantify that exposure to a portfolio.  That’s the first step in mitigating the risk of a natural disaster impacting a portfolio of insurance policies, loans, accounts receivable, or investments. Being able to quantify the amount of exposure to potential weather events or other natural disasters also applies to vendor supply chains.

After that it is a relatively simple matter of taking those risk probabilities and evaluating their concentration within a portfolio.  We can identify the probabilities of businesses and households in California being impacted by wildfires, mudslides and earthquakes; along the Gulf Coast facing wind damage, storm surges and run-off caused by hurricanes; and in the Midwest being inundated by floodwaters.

Monitoring risk exposures is all well and good, but the process should start when you are vetting the loan prospect, customer, vendor or investment.  Underwriters and credit analysts have traditionally focused on financial risks, as well as political and currency risks when cross boarder transactions are involved.  Granted, insurers may look at environmental risks with some types of policies, but that factor can be overlooked with other products, leaving the door open for a natural disaster to impact a portfolio in unexpected ways.

Whether you are looking to upgrade your vetting process to include environmental risks or you want to identify and monitor your exposure to climate change events and other natural disasters across your portfolio, we can provide the site-based intelligence you need to implement an action plan. The potential savings will dwarf the costs of acquiring the actionable intelligence to mitigate your exposure.

The Reality of the Market for SBA 7(a) Lending: “Plenty of Room for Growth, But a Need for Targeted Marketing”

As experienced SBA Lenders know, the 28 million Small Businesses nationwide is not the actual size of the market for 7(a) Loans. It is much smaller because only 10% of Small Businesses can qualify for an SBA loan on both an eligibility and credit worthiness basis. Accounting for these this factor and several others, a market size of roughly 1.5 million for SBA 7(a) Lending seems more realistic - smaller, but still large enough to support the future growth of 7(a) Lending.

In 2018 more than 60,000 small business were financed through SBA Programs. While it was a highly successful year, from another perspective it represents only 3% of the potential market. There is plenty of room for growth!

In our view, many Community and Regional Banks have the greatest potential to grow their SBA Programs by identifying and developing the growth potential of their local markets. To realize this growth, we believe Targeted Marketing Programs are needed.

Our Program, SBA Market Insights, provides Community and Regional Banks the key element of all successful targeted marketing programs: the capability to identify SBA Loan Prospects in their markets with a high probability of becoming a funded loan.

These are High Value SBA Prospects because they have these characteristics:

  • They meet SBA Eligibility and Creditworthiness Qualifications

  • They have a low probability of defaulting on loan payments

  • They operate in one of the top 20 industries accounting for 76% of all 7(a) Loans

  • There is information on them readily available to evaluate their business and credit profile

  • There is current, detailed contact information on them to focus a target a marketing program

  • They have a need for financing within 90 days

Community and Regional Banks do not need to lend out of market to grow. They need better marketing tools to identify SBA Lending Prospects that will enable them to grow locally and lend sensibly.

The Keys to Reaching 'Near Bankables'- the Underserved Small Businesses

 

Online and other alternative lenders benefit from providing lending services to the small businesses that are underserved by the traditional banking community.  The challenge is identifying those small businesses that are credit-worthy but unable to secure the lending facilities they require from their bankers. To be able to market efficiently, alternative lenders need to target small businesses that have a high probability of needing a loan as well as acceptable risk characteristics.

Finding these prospects requires going beyond standard demographics.  Business size, which is often used as a primary selector, can be misleading.  Businesses in different industries are subject to different financial dynamics that affect demand for loans, so a smaller firm in one industry can both have a greater demand for lending services and require larger lending package than a bigger firm in another industry.  And because almost all small businesses are captive to the characteristics of their local markets, local economic trends will also affect their demand for loans.

Targeting underserved small businesses requires a multi-step process that overlays analytics and enhanced selectors such as loan demand and financial indicators.  Here’s what you need to do:

1.    Target:  Identify the businesses in your target segment that have a high probability of needing a loan and that also offer acceptable risk characteristics

2.    Prioritize:  This pool of small business candidates then needs to be prioritized based on those businesses that display the highest loan potential with the least amount of risk

3.    Select:  From this prioritized pool, you can then select the top candidates for your marketing efforts

The benefits of this approach, compared to the use of standard demographics to generate a marketing list, are higher response rates, translating into more loan applications received.  In addition, a higher percentage of loan applications will be approved due to the pre-screening, and those loans will be bigger as well. The result is greater marketing efficiency and lower underwriting costs.