This Metric Could Save Your Lending Business!
Everyday I speak with Lenders around the globe and I ask them the same simple question: What does a loan cost you? What is your cost per loan (CPL)?
I’m always surprised how many do not have an answer. For most, a loan in any form (Mortgage, Credit Card, Consumer Loan, Micro-loan, Payday loan, Small Business Loan, etc.) is a product that is being ‘sold’ to a customer. Even if you accept deposits (Banks, Microfinance Banks, Credit Unions, etc.), some portion of your operations exist to design, build, originate, administer and service loans. Every loan you sell must cover the costs associated with its creation, packaging, marketing, sales, distribution and servicing.
While it is common to examine other crucial aspects of lending such as Portfolio Quality (Portfolio At Risk – PAR) it is not as common to see lenders evaluating the quality of the inputs into the costs of those loans that have become delinquent. The cost is not only the Principal at Risk it includes many other inputs that require tracking and analyses.
There has been some concern that CPL may unfairly punish lenders who lend small loans. It could, but it is still worth understanding within the context of your specific business model.
Common Costs Associated with Loans
Loan costs should be amortized (spread) across your portfolio and all new loans produced should be burdened by a proportional segment of those costs. You can allocate costs by loan products as well. For instance, it is common for small business loan products to require enhanced processing when compared to ‘payday loans’.
- People costs associated with selling/originating the loan product.
- General people costs associated with the administration of the business. This may include the cost of the owner/proprietor.
- Costs of Utilities
- Property Costs including Leases or Rents
- Technology Costs – If you are manual then a cost of inefficiency should be allocated.
- Cost of Capital
- Other Operating Costs
- Other Costs incurred in the production and/or servicing of the loan
Common Ratios to highlight the ‘cost’ relationship
Cost Per Loan: Your fully burdened operating costs / Total # Active loans
Cost Per Branch: Your fully burdened operating costs / Total # Active Branches
Cost Per Borrower: Your fully burdened operating costs / Total # Active Borrowers
Cost Per Loan Officer: Your fully burdened operating costs / Total # Active Loan Officers
Beware of these cost drivers
We all know that it’s almost impossible to grow revenues in a cost-neutral way. Top-line sales growth will require more resources but resource growth can be managed smartly, especially with proper use of technology. Technology can be a core strategy in managing the growth of costs as you grow your business.
Technology is a special kind of cost. It behaves differently because it allows scale. Really good technology will allow you to super scale and to do it very quickly. But most technology costs require large capital outlay which is not the best use of capital when you’re in the lending business. In some other cases, you may be required to consider pegging your actual revenues to the cost of your technology. And then there is LoanCirrus that simply gives you an easy way to cost their service fees right into the CPL. This makes sense and it’s real scaling. You’re literally only paying as you grow but you’re not paying based on something like your revenue. If you price your loans right, a price per loan model basically allows you to pass your core technology costs onto your customers. Yes, you would need to discount your respective bad debt portfolio amount from receipts.
Conversely, not investing in technology is also a key cost driver. The cost of inefficiency is very real. In an era of technology failure to invest in the right technology can be an existential threat to a lending business.
To Your Success!