7 reasons why most lenders fail within a year 

Lending is one of the most profitable businesses in the world. Some of the most powerful organizations are directly involved in lending or have significant investments in the sector. Even the tech industry giants owe much of their success to the backing of lenders and bankers. However, despite its potential for high returns, many lenders still face challenges and fail.

According to the U.S. Bureau of Labor Statistics (BLS), approximately 20% of new businesses fail during their first two years of operation, 45% during their first five years, and 65% during their first ten years. Only 25% of new businesses survive for 15 years or more. These statistics haven’t changed much over time and have been fairly consistent since the 1990s.

Let’s focus on lending. Why do many lenders fail? Almost everyone has lent money at some point, and those who get their money back often see it as a viable business opportunity. They think, “Why not make easy money from lending, especially with some spare funds available?” 

However, running a lending business is not for the faint of heart. To boost your chances of success, you must understand why others fail.

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Lack of understanding

Most people enter the lending business without a clear understanding of what it entails, their goals or strategies. They might have heard that Mr. A left his banking job to start a lending business and is now excelling and making a lot of money. Inspired by his success, they dive into lending without fully grasping all it takes.

Poor risk control

Many new lenders often neglect risk control and fail to gauge their risk appetite. They aim to lend to everyone in an effort to make more money without using smart data to verify borrowers’ creditworthiness or consulting credit bureaus and alternative credit data. Lacking a solid understanding of credit risk, they end up disappointed with high non-performing loans (NPL) and fail within a year of kickstarting their lending operations.

On the flip side, some lenders start to be too conservative. They’re so afraid of lending that they impose rigorous requirements on applicants. Their risk model is so stringent that perhaps only God could qualify for a loan. As a result, they struggle and eventually fail.

Poor asset and liability management

Some lenders fail because of their inadequate asset and liability management skills. It’s not necessarily about being wasteful. Many new lenders augment their lending capital with loans from investors or other financial institutions. This practice is christened as on-lending. A basic principle in treasury management advises that if you’re lending to borrowers for long tenors, you should seek long-term loans from investors as well. What this means is that you should never take short-term loans from investors to fund long-term loans for borrowers. 

Lack of technology to scale

As with most sectors, technology is needed to scale a lending business. For whatever reason, some lenders hold themselves back from maximizing their growth capacity by relying heavily on manual lending processes in this day and age, which is a recipe for failure. Alas! Some have been lucky to find so early on advanced end-to-end loan management software providers like Lendsqr that have helped them scale. 

Incompetent staffing

With over five years of lender interactions in our arsenal, we’ve discovered that inadequate quality staffing is a primary cause of lenders failing within their first year. You can have top-notch technology, thorough understanding, robust risk controls, and ample financial resources. However, your efforts will likely falter without a capable team to execute, leading to early closure. A lending team must be quick to grasp market dynamics, understand the target audience, effectively utilize available technology, and excel in customer relationship management.  

Inconsistent business management

Jack of all trades, master of some. When it comes to an industry as delicate as lending, you must be Jack of ONE trade. It’s safest to give your little brain-child all the time, resources and energy you can muster, particularly in its early years, just like a newborn who needs their mother’s attention and help to survive at every instance in the first few years of their life. The same goes for a new lending business.

Fraud attacks

Technology often moonlights as a double-edged sword. It makes every sector better and faster—when we say every sector, we mean every sector, including reverse cybersecurity sectors. The bad guys have also gotten ahold of technology and have gotten smarter with it. A lender who never pays attention to their system would easily fall prey to hacks, fraud tactics, and the like. 

Succeeding at lending 101

Understanding these pitfalls is the first step toward building a resilient and successful lending business. By addressing these common challenges, you can improve your chances of success. While the lending industry offers immense potential for profit and success, it requires careful planning, strategic execution, and, most importantly, a deep understanding of the market.

By learning from the mistakes of others and proactively addressing these critical areas, digital lenders can avoid being part of the negative stats and build a sustainable and thriving lending business. Let’s make your dream a reality today. Send us a message at [email protected], and let’s get you lending.