Building a viable lending business is no easy task. But in recent years, the democratization of technology and the rise of numerous FinTech startups has led to a great lowering of entry barriers into the digital lending niche. With 82% of businesses failing due to cash flow issues, the lending market, especially that of digital SME loans, presents a great entrepreneurial opportunity.
If you think there’s a reason why only 26% of loans get approved by traditional banks and they are right to play it cautiously – there’s some truth to that. Lending as a business venture is no walk in the park and one needs immense dedication and formidable resources to build a successful operation from the ground up. But the competitive advantage often overlooked is the advance of technology which you can use to your benefit. Traditional banks, using traditional and outdated scoring models and employing bloated staffs across wide-spread branches haven’t adjusted to the world of digital.
That’s where the window of opportunity for the digital-native lenders presents itself. They are able to drastically lower the operational costs, increase efficiency and speed of decisions and servicing through automation as well as reduce risks by employing advanced scoring techniques to supplement the traditional approaches and data sources. For example, TurnKey Lender offers an advanced adjustable scorecard that uses deep neural networks to minimize loan issuing risks yet approve more of the safe loans.
To gain traction, a new lending business needs to achieve a balance between remaining financially solvent yet offering low-enough rates and fast-enough processing. All that can be achieved by means of automation of all the basic parts of the lending process like origination, underwriting, collection, reporting, and servicing. The market which consists of people ignored by established large-scale institutions is enormous, so it’s well worth looking into.
What you’ll need to do to start a digital lending business:
- Market research
- Business planning
- Lending automation
Let’s go over each point in a bit more details.
Even while going through a deep process of global change, the lending market is rather saturated. And to deserve your place under the sun, you’ll need to carry out a comprehensive research of what your target audience will be, what their current options are, what pain points you can address best, and what specific demographics of borrowers you will be serving.
Try to stick to the markets you already have a decent understanding of. You don’t necessarily need to become the go-to lender for everyone in your town. Start small. Maybe you’ll run an auto financing business or maybe you’ve worked in agriculture before so now you know what exactly you can offer to tilt the farmers in your favor. Map out all the possible business opportunities you can think of and find the niche that you can fill with people who will benefit most from having an agile and hungry lender working with their business.
You may use your business plan just as a framework of your own actions in the months to come, when you’ll be preparing for the launch or as a starting point for your presentations to investors if you decide to take that route of funding. Either way, this document is kind of like what a war general would do planning a battle. You sum up all of your advantages and disadvantages, gather as much intel as you can, brush up on your math skills to count all your expenses and build models of what you need to achieve and till when.
This is also where your knowledge of your target audience will come in handy. You will need to calculate the risks you will be willing to take, the interest rates that will be dictated by those risks, contingency action items, funding, and prospected returns, etc. Business plans differ but make sure to have several things clear: your initial costs and expenses, target market and selling points, and how long it’ll take the business to break even and start making profits.
Another important and often underestimated point is branding. But as we know, clothes make the man. Commonly, it takes a long time and numerous iterations to get the design brandbook, logo, and color scheme right. They need to both reflect upon your vision, be to your liking, and work on the target audience.
As with all the other points, the investments you’re ready to spare on branding completely depend on your overall budget, but the image is crucial, especially for a new business. So you may, of course, use a ready-made design and buy a $10 logo on Envato, and it may work out just fine if your offering and marketing will be that superior. But from experience, business owners are often perfectionist when it comes to their creations, so make sure to start working on your branding some time in advance.
This is a big one. No matter the jurisdiction, legal intricacies and regulatory compliance for a lending business are tough, especially the first time around. As a new lending business, you will need to open a legal entity, register for taxes (in some countries with different governing bodies, like state and federal), and open bank and checking accounts for your operation. You will also need to start taking care of accounting from the very beginning to avoid the paperwork from piling up and not to cross any lines you didn’t know existed before.
Lending businesses in most jurisdictions are strictly regulated, so you will need to consult with qualified lawyers or the authorities to get all the necessary licenses and permits to avoid fines and other legal repercussions. Keep in mind that from the start you’ll need to keep detailed records of all the actions and transfers that will happen within your business. You may even want to include the logic of money flow into your business plan, piggybacking on how your competitors do it.
The key here might be in transparency. In developed countries, the regulating bodies should be happy or at least required to help you set up your operation in accordance with their rules, so consider contacting them with any relevant questions or concerns you have.
You wouldn’t even start doing market research if you haven’t had a pretty good idea of where you’re going to get the money to back your loans. But here you want to run a deep audit of everything you (or your investors) have for this business. Or, if you’re going to launch a peer-to-peer lending operation, you want to know exactly how you’re going to reach the people who are going to lend money through you.
Some lenders start with their own savings or retirement funds, but that’s really risky. At the same time, you can turn to investors in search of financial support for your venture, but they tend to be very careful and picky as to who they entrust their money to. Plus, you will need a really good lawyer to help you organize the process not to end up doing something illegal or shady which could hamper your business down the road.
No matter what business you’re in, it’s extremely hard to find the people with the same values, vision, and chemistry as you who at the same time have the right experience. Nonetheless, you won’t be able to do all the things necessary to have a lending operation on your own. So assuming that you’ll take the reins yourself, any lending operation will also need someone to process loans, a bookkeeper, an accountant, at least a consulting lawyer, and a compliance specialist.
And even though it may be tempting to cut expenses early on, the lawyer and compliance specialists’ consultations aren’t something lending business can afford saving up on. Any mistakes in either domain can cost your business dearly.
I don’t mean to sound biased, but the single most crucial part of this list is the way you choose to organize your lending process. If it’s not about borrowing your buds a couple hundred dollars, then doing it manually or in Excel is simply unmaintainable. And a business that is going to scale will need proper automation.
And not just any automation, because lending is an extremely complex process with origination, risk evaluation, decisioning, underwriting, servicing, collection, reporting, and compliance. And all of that either takes days and weeks of your time or is seamlessly automated by means of TurnKey Lender’s intelligent platform. You can check our post about the things that your lending software should be automating here. But some of the most important points in general when choosing this kind of platform include:
- An advanced yet customizable scorecard (TurnKey Lender’s decisioning engine is customizable, is powered by deep neural networks, and combines traditional and alternative approaches and data sources to provide lenders with the most accurate borrower evaluation and lowest possible loan issuing risks.)
- All-in-one nature so that all the parts of the system worked together and all your employees could operate within the same interfaces but with different functionality accessible to them.
- Easy deployment. (TurnKey Lender’s team strives to deliver a truly turnkey experience to the business and the whole system can be ready to use on the client’s side within days.)
- Easy integrations. (TurnKey Lender’s platform has been successfully integrated with dozens upon dozens of third-party software solutions and data sources for the clients)
- Easy customization. (The boxed TurnKey Lender solution is flexible enough to be adjusted to pretty much any business’ needs. And for enterprise clients, we offer a special solution which comes with a state-of-the-art business flow builder which allows you to fully customize the platform within an intuitive drag-and-drop interface.)
- Security and privacy. Users expect their privacy to be respected and their data protected. And as a lender, you’re walking on thin ice. On the one hand, you need to collect and process a ton data to comply with AML and KYC, but on the other hand, you have things like GDPR in Europe which demand you to erase user data upon request. So there’s a lot of balancing involved. That’s why you need a platform that’s compliance-ready and a local regulation specialist to consult you.
That’s another point where you’ll need the involvement of a lawyer and a compliance expert. Get them to draft a loan agreement which you’ll sign with each of your borrowers and all the other documents which are required in your jurisdiction for them to officially become borrower and for you – their lender. Keep in mind that different types of loan operations (like mortgages, auto financing, microlending) all require different contracts.
You can of course just take a sample contract from the internet, but it’s strongly recommended to then adjust it for your specific operation. And even though many people don’t read the contracts that carefully, they should, because the clauses matter and you want to make sure that your contracts protect you.
For a digital lender, web presence is exactly what an office used to be for an old-school lender. It either makes you look credible, reliable, and relatable or you shoot and miss. But in the case with digital, the potential borrower doesn’t even need to cross the street, they just switch to the next tab with your arch nemesis there.
So consider investing in a properly designed website and make sure there are no bugs and everything loads fast. We’ve done some research, and speed is actually one of the decisive factors for lenders these days. And the web experience you provide is the first place to prove that you’re worth doing business with.
Of course, the site should be filled with quality selling texts that appeal specifically to your target audience and are optimized to show up in search for the keywords that make sense to you but aren’t too competitive.
If you can afford it, it’s recommended to hire someone qualified to do marketing for you. You will have your hands full with operational tasks and you don’t want to neglect things like PPC, SEO, content marketing, SMM, and email marketing. Not to mention offline campaigns in more traditional media, if that’s where your audience hangs out.
Each lending operation is different, but the things I listed above are those you won’t be able to avoid doing. There are a lot of moving pieces. Chances are that many things won’t go as planned and you will have to adjust on the go. But that’s quite alright and that happens to everyone.
So now that’s everything ready for the launch, don’t worry and just try to serve your clients to the best of your ability. Be agile and adjust processes where you see you can improve. The main advantages of digital lenders are speed and agility. Capitalize on that.