Drafting a strategy for your lending business

The business strategy is the foundation of every business, it provides guidance to what the organization is set-up to achieve. The first step towards building a strong lending business, with long-term sustainable growth is having a clearly defined strategy.

In simple terms, your strategy tells your stakeholders (internal and external) what your organization will be focused on, and what you will and will not be investing your resources in. A clear strategy assists everyone within your lending organization to focus on what is important to the organization.

Coming up with a business strategy often seems daunting and scary and the picture of long documents that just go on and on may come to mind. However, former Harvard Review’s Roger Martin, simply defines strategy as choice; an interconnected collection of powerful choices that position your business to win. Consequently, he designed the Strategy Choice Cascade Framework which poses five important questions a business must answer in drafting its strategy.

Follow as we walk you through step by step to develop a winning strategy for your lending business.

What are my business objectives?

Perhaps the first step is to highlight what your overarching goals are and the specific benchmarks by which you’ll gauge the success of your lending business. At this point you will define financial and non-financial objectives for your business. It’s important to first define broad headlines for the business which will then cascade to the different departments to make them actionable.

As a lender, some questions you might want to consider answering in order to develop headline objectives include:

• How much in loans do I want to disburse?
• How many loans do I want to give out in terms of count?
• How many borrowers do I need to disburse this amount to?
• How many users do I need to onboard on my platform to get good borrowers?
• How much revenue do I want to make?
• What non-performing loans (NPL) ratio must I maintain?
• What profitability do I want to maintain?

After defining headline objectives for the business, you then translate this to targets for the different functions  of your business:  sales, marketing, operations, customer support, finance, credit risk management and others. This promotes synergy across board and ensures all functional activities are geared towards achieving the broad objectives of your lending business.

The objectives you set must be tested against the resources at your disposal. There is no benefit in defining key performance indicators (KPIs) and ambitions that are disconnected from your reality, this will only lead to discouragement.

The process of defining your business objectives should ideally lead to drafting a budget for the business

Where will I play?

At this point you’ll review the business sector and segments in which you want to operate. As a small and medium-sized lender, there’s no point in attempting to serve all sizes of customers. You might spread yourself too thin and not perform well with any customer segment. Essentially, making your business a jack of all trades, mastering none. Instead your organization can benefit from focusing on specific lending sectors, this could be vehicle finance, personal loans, asset finance, phone finance, small and medium enterprise (SME) lending, etc.

Subsequently, with clarity to the sector you want to focus on, you can then begin to identify partners that you require to deliver the highest quality of service. For instance, choosing to play in the asset finance space might imply working with large stores to provide credit, leveraging on their know-your-customer (KYC) process.

When making the decision on the space you want to operate in, in the field available to you, you’d need to consider the short and long-term economic viability of that sector. Will you be able to make money by serving customers in this sector?

How will I win in my selected market?

Moving on to this point,  you’d have identified the lending sector you want to concentrate on. Next thing you need to do is to draw up value propositions that will make you attractive to the kind of borrowers you want to serve.

While selecting the sector you want your lending to focus on, you must have also identified the borrower segments you want to service. Do you want to provide lending services to business owners, students, workers or parents? There’s a wide variety to choose from.

The decision on which borrower segment to go with, will guide your value proposition and that value proposition is what will help you win in your selected market. Your value proposition must answer the question: what do my customers want?

With your value proposition defined, you must link this to your loan products and services. The features of your lending products must capture the heart of your value proposition. For instance, if you’re offering educational loans to students which tend to be large loans, it’ll be more reasonable to include a longer tenor and a flexible loan repayment schedule as opposed to what you’d have if you decided to provide micro loans to traders.

What capabilities do I require?

Now that you’ve identified what, where and how you want to win, the next question to answer is “what do I need?”. Here, you need to link your objectives to technical and non-technical skills that are required to deliver your set objectives. Itemize all roles you need to fill to achieve your objectives – finance, operations, credit risk management, sales, marketing, etc.

Take it a step further and identify how to acquire these capabilities. Are you going to recruit on a full-time basis or just get contractors? Decisions as to how to acquire these capabilities will influence your cost budget.

Additionally, you can’t run a successful lending business without technology and data to make quality lending decisions or even make your loans available at scale. Are you going to build your lending proprietary platform and applications yourself or opt for a Lending-as-a-Service (sometimes called loan management software) platform like Lendsqr that’s already done the work for you and can offer you state of the art lending solutions at a fraction of the cost of your own building efforts?

What management systems do I need to build key capabilities?

The simple truth is that without a suitable management system in place that harmonizes all other aspects of your lending business strategy, this completely falls apart. Management systems drive the success of strategy and show you just how viable your lending business strategy is when all the chips are down.

A good management system covers decisions on the following:

Resource investment: This basically satisfies the question of what you spend the most on to make your lending business stand out and maintain that uniqueness. As a lender, if you pride yourself in providing quick loans to borrowers who need the cash urgently, you have to invest in building the best loan decision engine that can assess loans thoroughly and disburse loans within minutes or, if possible, even seconds. Is quality customer service more important to you and you wish to set yourself apart as the lender who’s always there for customers? This skews your resources disproportionately towards training your customer support staff to be competent and knowledgeable about the entire lending process. It’ll also require equipping them with superior customer management tools that allow them to automate most of their processes.

The good news is that whatever path appeals more to your business, Lendsqr can cater to your needs. In addition to having a robust and extensively configurable loan decision and blacklist engine, Lendsqr has also partnered with Freshworks to give every lender up to $10,000 credit to equip their customer support team with the best customer support technology around. All you have to do is sign up for free and you can access these within 5 minutes.

Decision rights: The point of this is to be as innovative as possible with decision making within the organization. Does every loan application pass through your own desk as the business owner before it’s approved? Does every customer complaint have to pass through a supervisor before it’s resolved? If you answered yes to these questions, this can really slow your business down and make you lose your winning edge.

Set up a system for managing decisions such that decision rights also cascade down the hierarchy. Use a combination of technology and adequate staff training to ensure your credit risk management and customer support team can make quality decisions independently. These decisions must be in harmony with the business objectives of course. Promote independent thinking and problem solving within the team.

Measurement tracking: This is particularly important with teams operating independently. Adopt a system that manages results by tracking metrics that by regular standards, might seem like overkill. But this is what might give you the edge.

As much as you might want to focus solely on the loan applications that make it through the funnel, how about you monitor those that don’t as well? Go even further and set up a system that tracks the stages of the loan application where borrowers typically give up. There might be an issue there that you might not know of. Reaching out to these borrowers to find out what went wrong and guiding them through the process could drive more business for you that you might not have benefited from otherwise.

This is no “right” answer per se when developing a strategy for your lending business but ensuring synergy in the approaches that you decide on for each segment could bring you several steps closer to winning in the lending space.

Find out more about what problems Lendsqr is solving for its lenders. You can reach out to [email protected] for more information on the best suited strategy for your lending business.