Common mistakes lenders make when choosing a business model

The lending industry can be a goldmine, drawing in entrepreneurs with the promise of steady profits and the chance to bridge the credit gap: giving people easy access to loans and helping businesses grow.

Based on our market assessment, we estimate a consumer and SME credit gap of ₦72 trillion ($173.5 billion), which we expect to grow in direct correlation to the country’s expanding population.

Nigeria’s estimated consumer and MSME credit gap of about ₦72 trillion presents a very huge opportunity for lenders. At a conservative profit-margin of 2% the existing credit gap implies that lenders have a profit pool of about N1.5 trillion untapped.

But success requires more than just a desire to hand out loans.

The secret weapon of any thriving lending business is a smart business model. This is basically a plan that shows how the company will make money and provide value to its customers.

Unfortunately, many lenders make big mistakes right at the beginning, hurting their chances of success in the long run.

This article will explore these common pitfalls, giving you the knowledge you need to make the right choices and build a solid lending business model that helps both your customers and your bottom line.

Lack of market and user research

The lending business thrives on understanding your audience and the specific needs within a market. But some lenders skip this vital step and rush in with a one-track mind to hand out loans, without a clear target audience or a plan for how they’ll reach them.

It’s like building a house without a blueprint – things are bound to go wrong, such as:

Blind targeting

Without customer segmentation, lenders end up shouting into the void. They haven’t identified their ideal borrower, leaving them unsure of who to reach, where to find them, and how to tailor their message for maximum impact.

For example, a lender offering high-value equipment loans yet solely relying on social media marketing. This might reach a broad audience, but it’s unlikely to connect with the niche market of equipment-seeking businesses.

Featured read: How to design a customer centric lending product

Mismatched technology

Technology should empower your target audience, not create problems.

For example, a lender offering microloans to underbanked individuals. A website might work for some borrowers, but it wouldn’t be ideal for someone who needs a small loan and might not have a computer or prefer using their phone.

In this case, a user-friendly mobile app would be far more effective in reaching and serving this specific customer segment. Alternatively, a lender targeting established businesses in a specific sector, like healthcare, might not require a mobile app.

A robust web application with advanced security features would be more suitable for handling complex loan applications.

These are just a couple of examples of how skipping market research can lead to a disconnect between lenders and their target audience. If you don’t understand your customers’ needs, preferences, and how they use technology, you might create a product or service that nobody wants.

Poor understanding of the tech or platform being used for lending

Imagine a doctor who can’t operate the medical equipment – the outcome wouldn’t be pretty. The same goes for lending – without proper tech training, the entire operation can stall.

We’ve seen numerous cases where lenders choose a lending business model they are ill equipped to manage, and struggle to understand the tech they need to operate. They might invest in a lending platform but neglect to train themselves or their staff on how to use it.

This lack of knowledge creates a domino effect.

Lenders who don’t understand the platform struggle to configure loan products that meet their needs or set up effective decision models for loan approvals, and when problems come up (like they always do), they’re left scrambling, unable to troubleshoot or handle them properly.

The gap widens further because, without proper training plans, this lack of knowledge trickles down to the staff. Without this knowledge, it’s impossible to effectively train new staff, creating a domino effect of deficiencies throughout the organization.

New employees are left in the dark, unable to learn from their superiors. This not only makes it hard for them to help customers, but it also slows down the entire lending process.

Without a bridge of knowledge and training for both lenders and staff, even the most advanced technology becomes a roadblock to success.

Launching complex loan products

Have you ever been to a restaurant, seen the menu, but the food categories are so many with different confusing names, you don’t even know what to order? The same goes for loan applications.

Less is often more, especially when it comes to loan products. But some lenders get excited and bombard potential borrowers with a buffet of loan options. It might seem like a good way to cater to everyone. But in reality, it is counterproductive and confusing.

When users visit your platform and see six different loan options with varying terms and conditions, they might not know where to start. This lack of product segmentation, especially between web and mobile app users, can leave borrowers feeling lost and frustrated.

Think of it like this: a user on your mobile app, likely on the go, might be looking for a quick and easy loan. But if they’re faced with a complex decision model and a variety of high-ticket products, they might get discouraged and abandon the application altogether.

Even worse, they might apply for a loan they don’t qualify for, get rejected, and leave frustrated. Product overload hurts sign-ups and can chase away potential customers.

A smart lending business model rather focuses on offering a limited selection of clear, well-defined loan products targeted to specific customer segments. Plus, keeping the decision model straightforward makes the application process smooth and user-friendly.

Throwing money at marketing without understanding your baseline performance

Many lenders jump into marketing with the enthusiasm of someone buying lottery tickets, hoping for a windfall of new customers. But before you throw money at marketing campaigns, take a step back and understand your baseline performance.

This means knowing how many users you organically attract without any marketing efforts. You launch a flashy ad campaign and see a surge in user sign-ups.

Fantastic, right? But hold on. Without a baseline, you can’t tell if these new users are genuinely interested or simply enticed by temporary promotions. They might disappear the moment your ads stop.

Here’s why knowing your baseline is important for your lending business model:

• Measure what matters: Knowing your baseline user acquisition allows you to measure the true effectiveness of your marketing campaigns. Are they attracting new customers, or simply amplifying a minor organic flow?
• Identify your profit margin: Without a baseline, it’s impossible to calculate your profit margin. Are your marketing strategies bringing in enough customers to offset the cost of advertising? Or are you bleeding money on short-lived promotions?
• Distinguish signals from noise: Free trials, discounts, and giveaways might inflate your customer numbers initially, but they’re not sustainable metrics. These “audio numbers” don’t reflect genuine customer interest, but they can distort your actual performance and create a false sense of success.
• Provides valuable data for future marketing efforts: You can then optimize your campaigns to target the right audience and maximize your return on investment (ROI).

Featured read: A guide to promoting your lending business using digital channels

No customer support plan

Many lenders view customer support as an afterthought, a department staffed by someone who answers basic questions. But this couldn’t be further from the truth. It’s not a low level task.

A robust support system is the beating heart of any lending business. It directly impacts customer satisfaction, retention, and ultimately, your bottom line.

Here’s why customer support deserves a seat at the strategy table of your lending business model:

• Your support team is the front line: Whoever is in charge should be as good as someone you can employ for a managerial role. They hear firsthand about borrowers’ needs, concerns, and frustrations. Happy customers become loyal customers, and loyal customers are more likely to recommend your services and return for future loans.
• Not everyone will be eligible for a loan right away: But how you handle a rejection can make all the difference. A dedicated and knowledgeable support team can explain loan terms clearly, offer alternative solutions, and leave a positive impression even when a borrower isn’t approved. Remember, today’s ineligible customer might be tomorrow’s prime candidate.
• Long wait times and unanswered messages scream one thing: Your customers don’t matter. Monitor your emails, phone calls, consider live chat features within your mobile app or web platform, and even consider social media for real-time interaction.

Little or no knowledge of required licenses

The lending industry can be a goldmine, but it’s not like the Wild West. Every region has its own rules of the road, like licenses, that lenders need to follow. Some lenders miss this step, focusing on who they want to lend to but forgetting the legal stuff they need to take care of first.

Here’s why knowing about lending licenses is important:

• You need to play by the rules: Not having the right licenses can get you in hot water. We’re talking fines, lawsuits, and even having to shut down your business.
• Transparency builds trust: Following the law shows you’re a responsible lender. This builds trust with your customers and a good reputation.
• Knowledge is power: Knowing the license requirements can actually help you design your loan products and services in a way that better suits your target audience.

Luckily, we’ve written articles on how to get different licenses including FCCPC license, Rwanda lending license, state lending license, and cooperative license.

Avoid these potholes and you’ll live to lend another day

The lending business can be a lucrative and fulfilling venture, but with great opportunity comes great responsibility. Without taking the necessary measures, it’s easy to crash and burn.

Instead, take the time to understand your market, tailor your offerings, and build a user-friendly experience. Invest in the technology that empowers your business, not hinders it. Most importantly, prioritize your customers with clear communication, exceptional support, and unwavering adherence to regulations.

If you really wish to live to lend another day, send us a message at [email protected] for immediate support.