How To Start A Powerful Lending Business
I know not everyone wants to start a lending business, some only want to make quick money. But if you’re serious about building a great lending business this may help. This is not a checklist of items to do in order to setup a lending company, if you want that we have one and we offer it to all our new customers.
Part of what makes a product like LoanCirrus special is that it needs to support lending around the world – literally. At time of writing, we have customers in over 20 countries. Lending takes on different forms around the globe: secured versus unsecured, payday, microlending, micro-business/SME, consumer financing, cash secured, balloon, no interest, peer to peer and the list gets long. Lending is definitely not a “one size fits all”.
So, how do we start a business in an industry that is so amorphous? Are there certain common connectors that bind all successful lending businesses? A sort of observable trail of breadcrumbs that we can point to and say “hey, there is the path followed by great lenders!” Well, it turns out that trail actually exist. Success in lending can be observed, best practices do exist and protocols are in place. It really isn’t (supposed to be) the Wild, Wild West.
No one should ever talk ‘success’ without discussing the mind. The mind is a ubiquitous contributor to success.
|Growing a healthy Portfolio is hard||Growing is easy just lend more money.|
|PAR is important||PAR – what’s that?|
|Average Loan Size always on a diet||Average Loan Size keeps growing|
|Business & Me: not same person||I’ve got a lifestyle to support|
|Measure 2x Cut Once||Cut then measure|
|I really like helping people||People represent revenue|
|I expect it to be a challenge||I expect it to be easy|
Starting any business is hard but it is especially hard in a business where the product you sell is actually ‘money’. Why? Because money changes everything.
The need for money changes people – it will change the way you view your customers and it certainly changes the way your customers see you. It takes a lot to be normal around money. In our recent article 5 Deadly Startup Mistakes Lenders Make I talk about keeping your ego in check. An uncontrolled ego will get you into trouble in life and certainly in lending.
Ego issues are hard to self diagnose – your ego never wants to be wrong. But if you look closely you can see some clues. Every time you make an arbitrary lending decision it is likely a sign of an overactive ego. If you decide the customer should get a smaller loan because you ‘feel’ that way OR you grant the loan or increase it because you ‘feel like it will work out’ OR you make the exception that your long lost Uncle who you know has never had a steady job shows up and you give him a loan 2x your average loan size, your ego is at play. Any action driven by FEAR and/or GREED is directed by your EGO.
No Roots? No Growth.
Trees that are strong and tall usually have deep and wide roots. It’s the same in business. If you want to build the #1 lending business in your country or region, or in the world for that matter then you must take the time to cultivate deep roots.
What are roots? They are the foundational things you must do to enable your business to have sustainable growth. When the tree is young it is most susceptible to distress and instability. To avoid ruin, roots are needed to anchor and support you during the rocky early days when you will make all your major mistakes (hopefully).
At LoanCirrus, our roots have kept us steady so far during what we think may be the rockiest part of our journey. We focused on a few things that really allowed us to be stable. These may not fit perfectly to a lending business but they may still help you. (we might do articles on some of these later)
6 Things we did from the start that paid (paying) off BIG
- From the start we saw ourselves as we hoped to become and not as we were. If you can’t visualize it then you are simply leaving it up to chance. So, we planned for the business we wanted to build.
- You are always selling SERVICE. We knew we sold a software service but we were NOT in the software business, we were in the customer business. We understood from the start what our differentiation would be: Value & Service.
- They are always buying PRODUCT. We knew that our product had to be better than the others. People don’t go to restaurants for seating comfort. They really don’t – it’s always for the food. Things like our decision to use a top tier infrastructure partner in Rackspace (rackspace.com) over cheaper and in our view, less resilient partners was a cornerstone of us ensuring that we took the product seriously. Everything from our technology tools and our engineering approach was about product.
- Your Price matters more to YOU than them. Pricing should be a reflection of your perceived value first. Value is a classic conundrum because it is both art & science. Who really knows what anything is worth? The answer: He who needs anything the most. I am not saying you should ignore your competitors but set your price and justify it with your product and service.
- We understand that Cash is King. So, from the start we set our first goal to become cash sufficient in our first year even if this meant that we couldn’t go after huge numbers early. It is more important that we are stable and can create breathing room to actually grow. We haven’t achieved cash self sufficiency as of writing this article BUT the strategy actually forced us to make certain decisions that turned out to be the right decisions for us, especially in terms of hiring staff and staying virtual without physical offices, technology frameworks used and many more crucial decisions we’ve had to make. But here is the thing… in lending, Cash isn’t just King it’s the Emperor. In every business cash is needed to allow you to deliver your product or service to customers. Then of course, you expect those customers to pay you back and then you can pay your bills and keep what is hopefully left over. At LoanCirrus and most businesses that is the model we use. Lending and Banking is a little different.
Normally cash is seen as a capital resource to be used to procure the things you need to then make or sell to get cash. So it looks like this:
CASH LEAVES – CASH IS REPLACED – CASH ARRIVES
CASH LEAVES – – CASH ARRIVES
That big, gaping empty space you see between what leaves and what arrives is where all your competitors who didn’t bother to read this article go to die. Ok, maybe that’s a little over the top – you don’t have to read this article or use LoanCirrus to survive lending. But, seriously this is the real cash flow trough in lending. It is danger and failure to understand how to bridge that gap is the #1 reason you will fail at lending.
DO NOT LEND $1 until you have a written plan on how you will bridge the gap. Notice I am not suggesting that you CLOSE the gap, only that you bridge it. The gap is important because it is where value is created. A gapless transaction would be a Cash Secured loan. Give me $1 and I will loan you $1. I have replaced cash with cash in the exact same value. And of course, a low risk transaction such as this would warrant very small returns.
6.Understanding that Process is more important than money. Everything in your brain wants to disagree with that statement – process more than money? In a lending business? Surely, that cannot be. Find me a Bank without a compliance department.
The only way to offset and neutralize the effects of our ego is by slavishly following PROCESS.
If you are thinking about getting into the lending business you should try it. It’s a great way to provide much needed capital to persons, which in turn helps communities. It can provide for a decent living. It can, if properly run, provide long term value.
Apply This To Your Business
Before you start, get your mind right.
Develop a clear operational plan which focuses on differentiated service and product.
Establish the right processes and controls. Remember process is more important than money.
Manage cash carefully and wisely. That’s probably why you chose LoanCirrus. Our entire business model is built around helping lenders keep more cash in the business instead of taking it out to buy expensive software licenses.
Don’t do your business unless you understand how to use service to differentiate.
Be bold and humble.
To your Success!