Technology is key for lenders because it makes operations faster, reduces repetitive tasks, and cuts down the cost of serving customers. Yet, technology alone does not solve the problems that they wake up to every morning. After working with dozens of lenders across different markets, we have seen the same stubborn problems show up again and again. Navigating regulation and staying compliant, finding and retaining skilled talent to manage credit operations, building a strong brand and positioning it in a crowded market, customer acquisition that goes beyond word of mouth. And above all these issues, lenders still need access to capital to actually fund loans.
Onlending has historically been one of the most reliable ways to close that capital gap. It is not a new concept, but rather one of the oldest tools that has kept lending institutions liquid. The International Finance Corporation and other development finance institutions continue to deploy significant amounts of money into banks and non-bank financial institutions with the expectation that those institutions will push the funds further into small businesses and households that need credit. In Africa, this approach has been a steady mechanism that allows lenders to keep their books active even when equity or investor funding is limited.
This is the same logic that guided the creation of the Lendsqr onlending program. What we learned from the first cohort that used it is not theory but lived reality. The lessons are practical, grounded in actual performance, and focused on what lenders can replicate. No grand stories or sweeping promises, just the outcomes we saw and the practices that worked well enough to be repeated by others who want to scale responsibly.
Why onlending matters right now
The global shortfall in finance for micro, small and medium enterprises remains huge. IFC estimates the MSME finance gap in emerging markets at roughly $5.7 trillion. This statistic reflects the unmet demand from small businesses that cannot secure affordable loans to grow or even to keep operating. That sheer volume of unmet demand is what many lenders are trying to reach, and it is the reason onlending programs continue to exist. When development finance institutions lend to intermediaries, they inject liquidity into markets where commercial banks often prefer to stay on the sidelines. IFC has consistently reported that channeling funds through financial intermediaries has a multiplying effect, allowing more borrowers to be reached at scale rather than just a handful of large corporates.
National and regional development banks also play a similar role in local markets. Institutions such as Bank of Industry in Nigeria and pan-African financiers like the Africa Finance Corporation regularly provide facilities that flow down into smaller lenders. These kinds of funds are often structured in a way that makes them more useful than typical commercial sources. They may come with longer tenors that match loan cycles better or pricing that gives lenders breathing room as they manage their portfolios. In return, the lenders that access these facilities are usually required to meet higher reporting and performance standards, which helps build stronger practices across the board.
Guarantees fall into a related category, though they work differently. Instead of providing direct capital, development banks offer guarantees that make private investors more comfortable deploying money into markets they would otherwise see as too risky. This tool becomes particularly important for lenders that want to attract more private capital but do not want to load their books with expensive debt. Guarantees can unlock funding at better terms, and for lenders willing to meet the conditions attached, they expand the range of financing options available beyond just traditional onlending.
Related read: What problem is Lendsqr solving for lenders?
What Lendsqr built and why we tried it
We launched a one billion naira onlending program aimed at giving smaller lenders a predictable source of capital. The thinking behind it was straightforward. Many of the lenders we work with are often able to grow their operations, put technology in place, and build processes, but they hit a wall when it comes to raising fresh equity or securing long-term debt. That gap in funding usually shows up at the worst possible time, right when customer demand is high and origination is moving at speed.
Without a short-term option to fall back on, lenders end up slowing down or even halting disbursements, which hurts both their business and their customers. The program was designed to solve that particular problem by acting like an overdraft on their lending book, giving them the flexibility to serve customers and take advantage of growth opportunities without having to shut their doors.
This was never designed to be a free-for-all. We did not hand cash to anyone that knocked on the door. The program came with a clear application and approval process that required lenders to prove they had more than just ambition. We looked closely at operation structures to see if decision-making was clear and accountable.
We assessed underwriting rules to make sure loans were not being granted on a whim. Portfolio performance was examined to understand how existing loans were performing and whether repayment patterns showed discipline. We also paid attention to product concentration, since lenders with portfolios spread too thin across unrelated customer segments tend to carry hidden risks. Past non-performing loan levels provided another strong signal about how lenders were likely to manage new capital.
Focus was one of the strongest differentiators. Lenders that tried to be everywhere at once and offered too many products to too many types of customers often underperformed. Their operations were stretched, their credit policies lacked consistency, and the numbers reflected it. On the other hand, those that had a clear product strategy, stuck to it, and knew the customers they wanted to serve had stronger outcomes in the evaluation process. For us, the application review was more than just financial health but also about whether a lender was operationally ready to put additional capital to work in a disciplined and sustainable way.
The outcomes so far
Most of the lenders used the program exactly in the way it was meant to be used. They drew modest sums that gave them room to manage seasonal fluctuations, respond to spikes in demand, or take advantage of growth opportunities without having to disrupt their lending operations. None of them treated it as a substitute for permanent funding, which is often the mistake that pushes lenders into long-term repayment problems. The overdraft structure achieved what we hoped: it gave lenders enough flexibility to keep their customers served and their loan books active while keeping discipline around repayment.
Concrete results from the first year, anonymized and rounded for confidentiality:
- One healthcare-focused lender drew N50 million and went on to disburse more than N339 million during that period. The facility gave them the cushion to plug short-term funding gaps, and that breathing space allowed them to push out loans consistently rather than pausing mid-year.
- Another lender drew N10 million and disbursed N38 million in loans in the same period. For a relatively small draw, the multiplier effect was significant, showing that even a limited injection of capital can expand the reach of lenders with an already steady pipeline.
- Across the cohort, we recorded zero net NPLs attributable to the program after one year. There was one exception. A participant defaulted early, but because of the structure we had in place, they were promptly removed from the program and the exposure was fully recovered. The fact that the program absorbed this case without disruption to the wider cohort showed that the screening and monitoring process worked as intended.
Taken together, these numbers highlight a few important points. Access to short-term capital, when used responsibly, gives lenders the chance to scale origination much faster than they could with only equity or retained earnings. But the other takeaway is just as important: it is not the facility itself that guarantees results. The lenders who succeeded were those who were carefully chosen, monitored closely, and disciplined in how they deployed the funds. In other words, selection and oversight matter far more than the novelty of the product.
Related read: What is on-lending and how does it work?
Six practical lessons for lenders
Below are the lessons we keep returning to when we advise lenders. These lessons are operational moves you can take into your next portfolio review and apply immediately.
1. Capital without underwriting discipline is a trap
Every lender wants more money to disburse, but capital only amplifies whatever is already in place. If your underwriting is weak, more funding will not fix it, it will make the cracks wider. The lenders who rushed to expand without tightening their approval process saw repayment challenges appear quickly. An operational plan is not optional. It must set clear approval criteria, define who can approve what, and establish a collection process that matches the pace of disbursal. Without that alignment, you are essentially funding defaults in advance.
2. Focus the product set
The lenders that did best were not the ones offering ten different loan types. They were the ones that picked a clear borrower profile and stuck to it. A narrow product focus makes the credit policy enforceable, helps you understand repayment behavior, and reduces the chances of operational mistakes. Chasing every kind of customer usually leads to scattered marketing, inconsistent approvals, and poor collections. Clarity of focus, even if it feels limiting at first, gives lenders the structure needed to grow sustainably.
3. Treat onlending as working capital, not long-term equity
The onlending program was structured like an overdraft for a reason. It forced short-term discipline. Lenders had to draw, deploy, and repay in a rhythm that kept them accountable. Those who treated the funds as if they were permanent capital changed their behavior in ways that introduced more risk. Loan terms became longer than they should have been, monitoring slowed down, and repayment plans started to drift. Onlending works best when it is managed like working capital: responsive, short-cycle, and tightly monitored.
4. Monitor operational KPIs every week
Portfolio quality is built out of daily practices, not quarterly reviews. The lenders who performed best were the ones watching their numbers closely and often. Application-to-disbursement time, first-payment defaults, portfolio vintage performance, and recovery rates were tracked weekly, not monthly. That level of monitoring gave them the chance to adjust quickly when problems appeared. A sudden rise in first-payment defaults, for example, signaled issues with borrower screening that could be fixed before losses became significant.
5. Price for the risk you are taking
Onlending programs are know to carry a higher cost than some alternatives, but the choice for lenders was simple: pay a premium and keep the loan pipeline open, or shut down originations and risk losing customers. Most chose the former. The lesson here is that pricing must reflect the risk you are taking and the value of uninterrupted lending. If your cost of funds is low but you cannot meet customer demand, you are leaving money on the table. If your cost of funds is higher but allows you to serve consistently, the economics still work when the portfolio performs.
6. Build simple contracts and enforce them
Complicated legal agreements might look impressive, but in practice, a small set of clear contracts that can be checked frequently is far more effective. The lenders in our program worked with financial and operational contracts that were easy to monitor. When those contracts were breached, action was immediate. This approach removed ambiguity and reduced the chance of prolonged losses. The principle is straightforward: write contracts that matter, monitor them often, and act when they are broken. That is how we protect both the program and your portfolio.
Related read: Lendsqr launches onlending initiative to empower lenders with loan capital
What lenders should ask before any onlending program
Answering these questions forces you to look at your readiness in detail. The money itself is never the problem; the structure around it determines whether it fuels growth or exposes weaknesses. If you cannot give yourself a confident yes on each one, then you should pause before taking the money.
- How will the facility change origination behavior? Will you accelerate while keeping your credit standards intact, or will the temptation to loosen rules creep in once capital is available?
- What exact KPIs will you report and at what frequency? Weekly numbers on disbursement speed, early defaults, and recovery give you a chance to intervene before a problem turns into a loss.
- What happens if you miss an agreement or an early warning shows up? You need clarity on what the lender will do in that situation, not just a vague reference in the contract.
- Do you have the cash flow mechanics to repay if collections slow? Repayment discipline should not rely on best-case scenarios. Facilities only stay useful if they recycle, which means you need a cash flow plan that works even when collections drag.
Scaling responsibly
Onlending works, but only when lenders treat it with the seriousness it deserves. The first round we ran proved that however small these overdrafts were, when applied carefully and tracked closely, can actually move the needle. Lenders disbursed anywhere from N50 million to N339 million off the back of relatively modest overdrafts, and they did it without cutting customers off or letting their books go bad. That matters because the point is not just growth for growth’s sake, but growth that borrowers can depend on and that investors will continue to trust.
For lenders considering outside capital, the harder part is not signing the agreement but deciding how it will shape your business once the money lands. Clarity of product, discipline in reporting, and a willingness to act fast when numbers shift are what kept our first cohort on track. Ignore those and the facility will not help you.
At Lendsqr, we built a structured process that let lenders apply, access funds, and report performance in a way that gave them confidence. We didn’t only make money available but also required the right data upfront and followed through with consistent monitoring. That combination reassured all parties involved that our program was being used responsibly.
And since people always ask what is next: Onlending 2.0 is around the corner. We are taking the lessons from round one and tightening our efforts. If you want to know mpre about applications or whether your business would fit, reach out to us at suppport@lendsqr.com and we will share the details.
