Starting a money lending business can be a profitable endeavor if done right. With proper planning and strategy, you can build a sustainable lending business that provides value to customers while generating steady revenue.
Here is an overview of key things to consider when developing a money lending strategy:
- Understand legal/regulatory requirements in your area
- Determine what types of loans to offer (personal, business, etc)
- Decide on loan terms/structure (durations, interest rates, fees)
- Build lending criteria and risk models
- Source funding capital to provide loans
- Market services and acquire customers
- Leverage software to automate and scale operations
Crafting an effective strategy lays the foundation for a thriving lending operation.
Developing Lending Criteria and Risk Models
One of the most critical components of a money lending strategy is developing clear lending criteria and risk models to guide decision-making. Lending criteria refers to the standards and factors lenders use to determine borrower eligibility, loan sizes, rates, and terms. Risk models help assess the likelihood loans will default.
Here are key steps to establish strong lending criteria and risk models:
Research borrowing demand and risk profiles
- Conduct market research to understand needs of target borrower segments
- Gather data on default rates for similar loans
- Identify common attributes of high-risk applicants
Create loan application scoring system
- Determine key metrics to assess during applications
- Assign weighted scores to these metrics
- Metrics may include income, credit score, collateral, payment history, etc
- Set minimum score thresholds for loan approval
Establish tiered approval bands
- Segment applicants by risk level into approval bands
- Each band has standardized loan terms and rates
- For example:
- Low risk: Up to $10,000, 8% APR, 36-month term
- Moderate risk: Up to $5,000, 12% APR, 24-month term
- High risk: Up to $2,000, 15% APR, 12-month term
Integrate risk model projections
- Risk models estimate chance of delinquency/default
- Plug model outputs into lending criteria rules
- Ensures consistent risk-based decision making
Revisiting and refining criteria and models improves outcomes over time.
Determining Capital Requirements and Securing Funding
Access to capital is the fuel that powers any lending business. Determining how much money you need, and securing funding sources to meet capital requirements, is an essential strategic move.
Here is a strategic approach to capital planning for a money lending operation:
Estimate minimum capital needed
- Project average loan size and loan loss rate
- Multiply average loan size by number of borrowers planned per month
- Add proposed maximum outstanding principal
- Factor in assumed bad debt rate
- Result approximates minimum capital required
For example:
- Average loan size: $5,000
- Monthly borrowers: 20
- Max. outstanding principal: $500,000
- Assumed loss rate: 5%
- *Minimum capital = (20 * $5,000) + $500,000 + $25,000 = $525,000*
Evaluate funding options
You can fund loans from a few sources, each with pros and cons:
| Source | Description |
|---|---|
| Personal capital | Fast access Limited capacity |
| Business cash reserves | Moderate access Preserves personal assets |
| Investors/partners | Expands capacity Complex agreements |
| Bank/institutional loans | Large amounts available Rigorous application process |
Secure commitments
Based on funding needs and options:
- Get commitments from those providing capital
- Formalize agreements with clear repayment terms
- Ensure reliable access to capital before making loans
The more certainty around capital, the easier it is to plan operations.
Acquiring Customers and Marketing Services
To generate loan volume and revenue, a robust strategy for customer acquisition and marketing is vital for any lending operation.
Several proven channels can attract prospective borrowers:
Digital marketing
- Useful for reaching web-savvy applicants
- Tactics include:
- SEO to drive organic traffic from search engines
- Pay-per-click ads placed through Google, Facebook, etc.
- Targeted display ads on finance-related websites
- Retargeting ads to website visitors
- Provides trackable results
Print/broadcast promotions
- Leverages traditional media
- Tactics may involve:
- Newspaper, magazine, radio, TV ads
- Billboards located in high-traffic areas
- Direct mail campaigns to targeted consumer lists
- Harder to quantify effectiveness
Strategic partnerships
- Develop referral relationships with entities serving prospective borrowers
- Potential partners:
- Real estate agencies
- Small business associations
- Accounting/tax advisory firms
- Could structure revenue share agreements on loans referred
Networking/word-of-mouth
- Communicate offering at conventions, seminars, other events
- Motivate happy customers to organically refer others
- Low/no cost with trust benefits
An optimal strategy likely utilizes a mix of these options, with budgets allocated across channels based on observed conversion rates. Testing and optimization allows for resources to be shifted toward highest-performing channels over time.
Leveraging Software and Technology
Technology integration is key for scaling a money lending business while controlling costs. The right software makes operations more productive and efficient.
Here are some solutions worth incorporating into tech strategy:
Loan management software
Mission-critical systems that handle key workflows:
- Borrower portal – Receive and manage applications
- Document collection/e-signing – Securely collect signed agreements
- Underwriting automation – Score applications, render credit decisions
- Loan servicing – Payment tracking, late notices, collections
- Reporting/business intelligence – Portfolio analytics, risk insights
Top systems provide: workflow configurability, rules-based decisioning, document generation, data integration, portability.
Accounting software
Tracks financials, supports tax/regulatory compliance:
- Manage accounts receivable, payable
- Process electronic payments
- Reconcile transactions
- Structure financial reporting
QuickBooks, Xero, NetSuite are popular platforms.
Risk analysis software
Specialized programs bolster risk management:
- Predict loan performance/credit risks
- Track portfolio health metrics
- Model scenarios to stress test operations
- Guide risk-based decisions on capital allocation
Integrating outputs into underwriting systems closes loop.
CRM platform
Centralizes borrower data and interactions:
- Unified client database
- Email/SMS capabilities
- Task assignment, activity logging
- Reporting on engagement metrics
Salesforce, HubSpot, Zoho typical options.
Prioritizing solutions that easily integrate while meeting specialized needs allows for a scalable, optimized tech stack tailored to lending operations.
Providing Ongoing Value as a Sustainable Business
Launching a money lending operation is one thing – building it into a sustainable business over the long haul requires continually delivering value. Here are some strategic priorities that serve borrowers while fueling lasting success:
Maintain stringent risk management
While lending higher volumes generates more revenue, uncontrolled risk exposure threatens long-term viability. Strategy involves:
- Enforcing rigorous underwriting standards
- Securing diversified capital sources
- Testing portfolio performance under stress
- Modifying risk limits based on data
Balancing growth with prudent standards provides reliability.
Explore expanded product offerings
Start with a niche, then expand responsibly into other lending areas once established. Potential options:
| Product | Overview |
|---|---|
| Personal loans | Fund major purchases, consolidate debt |
| Small business loans | Expand inventory, bridge cash flow gaps |
| Commercial property loans | Finance development projects |
| Specialty lending | Unique assets like RVs, boats, jewelry |
Broadening into adjacent spaces serves more financial needs.
Provide a consultative borrowing experience
Rather than quick, transactional funding, aim to build relationships with borrowers – understanding their circumstances to structure mutually beneficial loan packages. Tactics involve:
- Needs assessments during underwriting
- Ongoing guidance around responsible borrowing
- Proactive refinancing when advantageous
This level of consultative service earns trust and loyalty.
The most sustainable model adapts over time – taking cues from borrowers while innovating around new opportunities that further strategic goals. Commitment to continual improvement cements longevity.
What are the 5 C’s of lending?
The 5 C’s of lending are a framework used by lenders to determine the creditworthiness of potential borrowers. Here’s a breakdown of each:
1. Character
- Lenders assess your credit history and reputation for repaying debts on time. Your credit score reflects this.
2. Capacity
- Lenders want to know if you have the ability to repay the loan. They’ll examine your income, debt-to-income ratio (DTI), and overall financial situation.
3. Capital
- This refers to the amount of money you’re putting down (down payment) as well as any other assets. Lenders like to see that the borrower has some “skin in the game” and is invested in the transaction.
4. Collateral
- Assets that can be pledged to secure the loan. In the event of default, the lender can seize the collateral to recoup losses.
5. Conditions
- The purpose of the loan and how the money will be used. Lenders also consider prevailing economic conditions that could affect your ability to repay or the value of any collateral.
Why are the 5 C’s important?
The 5 C’s offer lenders a systematic way to evaluate the risk of lending money. By carefully examining these factors, lenders can make more informed decisions, leading to:
- Reduced risk of defaults: The 5 C’s help minimize the chance of lending money to borrowers who won’t be able to pay it back.
- Fair interest rates: Borrowers with a strong profile across the 5 C’s can often secure lower interest rates.
- Responsible lending: Considering the 5 C’s promotes responsible and ethical lending practices.
Key Takeaways
- Conduct extensive research when developing lending criteria and risk models to guide decisions
- Estimate capital requirements based on projected loan volume and losses, secure commitments
- Employ diverse marketing tactics for customer acquisition, measure effectiveness
- Leverage specialized software to scale operations efficiently
- Expand products judiciously while providing consultative borrowing guidance
- Manage risk exposure stringently to ensure long-term sustainability
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Key Takeaways
- Conduct extensive research when developing lending criteria and risk models to guide decisions
- Estimate capital requirements based on projected loan volume and losses, secure commitments
- Employ diverse marketing tactics for customer acquisition, measure effectiveness
- Leverage specialized software to scale operations efficiently
- Expand products judiciously while providing consultative borrowing guidance
- Manage risk exposure stringently to ensure long-term sustainability
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