Consumer loans in the United States reached nearly $ 1.5 trillion in 2018, according to the Federal Reserve Board of Governors, and European banks reported 25% demand growth in the second quarter of 2018. Needless to say, now is a good time to lend.
While banks are still repaying the lion’s share of loans, alternative lenders are gradually emerging to fill gaps in the ever-growing loan market.
FinTechs exploit the growing market
The traditional banking industry is rooted in its old way of doing business. Both banks and customers expect a certain customer experience and a certain style of operational management. While this may appeal to some customers and lending institutions, it comes at a significant cost. Each interaction with a teller or call agent at a traditional bank costs an average of four dollars, compared to just ten cents for a mobile interaction.
While the benefits of running a fintech are clear, the process of building and operating is not without its challenges.
Practical Steps to Starting a Loan Company
Credit markets vary from country to country depending on regulations, laws and consumer behavior. This simple roadmap outlines the general process to get started.
First point: Become a legitimate business
To start lending online, business owners must create a legal entity. This is the vehicle that all lenders will use to handle the paperwork. As this process varies greatly from business to business, it can take as little as 1% or up to 20% of your initial start-up budget.
The basic steps include:
One possible way around this is to purchase a bona fide legal entity or an already existing loan franchise. For example, the largest franchise lender in the United States is Liquid Capital. The short-term costs can be a bit higher, however, the long-term benefits of using an existing last name could potentially pay big dividends.
In addition to the unique requirements for lending entities, regular business costs will often arise as well. Among others, these could include hiring and administrative overheads and office rental. On average, these costs can represent between 10% and 12% of your start-up budget.
Second point: raise funds
Raising capital to lend is the main operational challenge for any lending startup.
Usually the best way for a startup to start lending is to use its own capital, but when this is not possible (or favorable), funds can be raised in the market. Recently, institutional lenders have become much more comfortable providing capital to lending startups following the rise of the P2P model.
Any loan company financed by public investors will have to take into account the cost of hiring a chartered accountancy firm to perform an audit to certify all financial data, including their business plan, evaluation and other financial data.
Third point: Use the right technological platform
The heart of any modern loan company is the technology platform on which it operates. The platform is the brain of the business and takes time to develop and grow. It is better to do this in parallel with the other points because it is the main asset of the operation.
When it comes to platforms, there are two main options: build your own from scratch or buy an existing platform from a vendor. This critical decision will have a long-term impact on the business and will greatly affect installation and operating costs. Each option has its advantages and disadvantages:
- Building a loan system from scratch takes longer and can take up to 12 months. This requires a substantial initial investment as you will need both financial and technological expertise to achieve this. Additionally, changes in the market over time can be a factor, which is why the timing of your exit is of paramount importance. While this option can be risky, it gives lenders full control over the product they are building.
- Purchase of an existing loan platform is generally cheaper and faster. There is a wide range of ready-to-use and fully customizable solutions. The options fall into two general categories: traditional core banking systems (for example, Oracle, Temenos, and Infosys) or fintech-focused solutions (for example, HES loan software).
There are a number of software challenges that a digital lender should consider when choosing a platform:
- In order to optimize productivity, systems often require further customization.
- Some systems only cover one or a handful of aspects of loan management, such as underwriting, origination, or loan management, and do not support many back office functions.
- Systems often don’t integrate with the majority of third-party services, so lenders may need to mix and match software to run their business.
- Some systems do not extend well to new markets or product segments.
- Some systems require license upgrades to increase loan volume or the number of user accounts.
With a good understanding of the industry, careful planning, and approximately $ 200,000 to $ 1,000,000 in start-up capital, a state-of-the-art loan business can be launched. Not only do these businesses financially benefit their owners and investors, but they come with the satisfaction of knowing that every loan issued has great potential to improve the lives of borrowers and their communities.
Natalie Pavlovskaya is Director of Marketing at HES (HiEnd Systems), a financial technology company that pioneers comprehensive credit and credit rating solutions. She is a marketing manager with international business experience in the CIS, EMEA region and the United States, working for over 7 years in digital marketing.