Corporate members were introduced in the Legislative Reform Order (LRO) in January 2012 and although very few credit unions have taken up the opportunity, this area still represents a lucrative option. Corporate businesses differ from individuals so knowing the risks surrounding them and the main lending risks is crucial.
Corporate members are allowed to make up 10% of the membership, 25% of the non-deferred shares and 10% of the loan book. The corporate members include not just companies but community groups and social enterprises as well.
Get some buy in
Firstly get some buy in from the corporate members using deferred shares and subordinated debt. There is a restriction of 25% of non-deferred shares which can be owned by a corporate member, so this needs to be monitored but using different financial instruments can help. Marketing the use of corporate members to be for the good of the common area and their social responsibility may also help.
Covenants and personal security
The banking environment has a wealth of experience in corporate lending. Banks ensure they mitigate the risks of lending through the use of covenants within the loan agreements and personal security. Covenants seek to ensure that the business is ensuring it operates in a way to ensure the loans are repaid. Various monitoring either through covenants or other means also occurs within the banking sector. The types of common covenants would be:
- Accounts from the business, either monthly or quarterly;
- Statutory accounts to be presented within 'x' months of the year end;
- Certain levels of Earnings Before Interest Depreciation and Amortisation (EBITDA) to be achieved. EBITDA is an excellent way to monitor the cash availability within a business that can be used as loan repayments;
- Major restructure and other crucial business decisions to be agreed with the lenders before it happens.
Certain types of security can be taken as well including personal guarantees or debentures against the assets of the business. However there needs to be a fundamental understanding of how quickly and for what price the security can be turned into liquid cash if a liquidation of the company occurs.
Before embarking on loan agreements with Corporates a specific loan policy would be required. Part of this would involve questioning 'how do we know if a business is viable and can afford the repayments?' In most cases budgets, and most importantly, assumptions along with the business plans, would be required to see what excess cash is available within the business to allow for a repayment of the loan.
Searches on companies can be made via credit rating agencies, which can be done at any time without the permission of the corporate - something that cannot be done with an individual. This information however can be historic, although the agencies will tell you it is up to date. The truth is that most of the rating relates around the financial figures, and as company accounts can be filed 9 months after the year end, this does mean that the rating could be unreliable. In this instance, management information should be sought as well.
Bringing in corporate members will also lead to individual members within the corporate entity becoming members of the credit union. This can only lead to positive growth.
If you would like more information about how Hallidays can provide advice on systems and controls over corporate lending, please contact Philip Jones at Hallidays on
0161 476 8276
or email firstname.lastname@example.org