Running a lending business, as is the case with running any other business, requires business owners to make some tough decisions. Most lenders, especially those new to the lending business, are typically faced with the high-consequence question: “What should I primarily focus on -growing my customer count or growing profitably?” The former is concerned with having as many borrowers as possible registered with your lending business while the latter is focused on ensuring you’re making money from giving out loans.
Before we conclude on the approach worth pursuing, let us first take a look at a few benefits of both aspirations:
Growing customer count in a lending business
On one hand, having a large customer base is something to boast about in any business. More often than not, the customers “keep the lights on”. After all, even though you’re in the business of giving out loans as a lender, it’s customers who will still take out these loans and repay to make you money.
As a lender, focusing on ways to grow your customer count ensures that you have a large customer base within a short period of time. This is a key metric for measuring the growth of your lending business. One can argue that there’s strength in numbers and having more borrowers sign up on your platform or register with your business increases the probability that you’ll give out more loans.
Additionally, the data you can collate from a large customer base has extensive benefits to your business and could be valuable for cross-selling of your other products. For instance, it’s more likely that you’ll be able to convince a borrower who took a loan from you within your lending application, to try out your airtime top up services than to try to sell your airtime top up services to gain a new customer.
Apart from the cross-selling benefits, gathering large amounts of data from having many borrowers within your network allows you to make better informed lending decisions. You can analyze the behaviors of existing borrowers and determine which customer segments are more likely to opt for certain loan products or even those more likely to repay, etc. This way, you can adjust your loan decision criteria to yield better results if necessary.
Focus on profitability in a lending business
On the other hand, profit is vital to basic financial survival. Focusing on profitability drives long term sustainability of your lending business. Especially as a lender, you quite literally need money to give out money. A healthy lending business is one that’s able to make money from giving out loans. And more importantly, not incur losses from bad loans.
Profitability increases your businesses’ attractiveness to investors. Most investors, while looking out for the potential of your business to generate future earnings, are still very much interested in a business with a healthy profit margin. It’s an easier sell. Beyond generating more revenue, it’s important to remain agile; keeping costs as low as possible and utilizing resources efficiently. This also means finding the most cost effective ways to assess loan applications and recover loans.
Another benefit of focusing your efforts on profitability is being able to generate substantial capital to expand your lending operations into new markets. You can grow your lending from simply catering to micro loans to giving out bigger ticket loans, creating educational loan products and keying into buy-now-pay-later (BNPL) solutions. This can further position your lending business to be even more profitable.
Which approach is more beneficial to lenders?
As a small-scale lender it’s highly important you monitor several profitability indicators, including non-performing loans (NPL), net operating revenue and profit before tax.
You may choose to opt for a resident data analyst within your lending business who is able to constantly analyze trends driving non-performing loans within the portfolio. If this is done repeatedly over a period, you will be able to draw a trend as to certain customer traits that correlate with non repayment of loans e.g. borrowers in certain geographic locations, borrowers in certain professions, borrowers within certain income bands, etc.
However, we realize that this might not be the most feasible option, especially for smaller lenders. You can sign up on Lendsqr and get access to multiple reports that are automatically generated for free once you start lending. Lenders are able to track the performance of their loans, monitor trends with non repayment and make use of machine learning modules to analyze these trends with the expertise of the Lendsqr team to make better informed lending decisions.
Additionally, you will also be able to identify the personas that qualify as good borrowers – what do they take loans for, where do they work, etc. With these two segments of borrowers defined, you can iteratively adjust your risk acceptance criteria (RAC) to drive onboarding of the good borrowers. The more good borrowers you have on-boarded on your platform the better, you will be able to offer recurring loans to them and drive long-term profitability.
Other than limiting the number of bad borrowers on your books you also need to monitor the cost structure of your business. This fall into two main categories:
Acquisition cost: this is what you spend on prospecting and onboarding your borrowers. Ideally you should keep this to less than 20% of your revenue margin as a small scale lender.
Operating expenses: this is the totality of all costs you incur in running your business – employee expense, administrative expenses, etc.
At Lendsqr we strongly advise our lenders to build the ethics of running a profitable business as against large disbursals of poor underwritten loans that typically attract a large volume of bad borrowers.
You can reach out to [email protected] for guidance on improving the quality of your loans.