Consumer lending in the US reached nearly 1.5 trillion dollars in 2018, according to the Federal Reserve Board of Governors, and European banks reported a demand growth of 25% in the second quarter of 2018. Needless to say, it’s a good time for lending.
While banks are still paying out the lion’s share of the loans, alternative lenders are gradually moving in to fill holes in the ever-increasing lending market.
Fintechs Exploit the Growing Market
The traditional banking sector is entrenched in their old way of doing business. Banks and customers alike expect a certain customer experience and style of operational management. While this may appeal to some customers and lending institutions, it comes at a significant cost. Each teller or call-agent interaction at a traditional bank costs an average of four dollars compared to merely ten cents for a mobile interaction.
While the profits of running a fintech are clear, the process of getting up and running is not without its challenges.
Practical Steps for Setting up a Lending Company
Lending markets vary from country to country depending on regulations, legislation, and consumer behavior. This simple roadmap outlines the general process to get started.
Point One: Becoming A Legitimate Enterprise
In order to start lending online, business owners need to create a legal entity. This is the vehicle that all lenders will use to navigate red tape. As this process varies greatly from business to business, it may take as little as 1% or as much as 20% of your initial startup budget.
The basic steps include:
- Registering a legal entity
- Purchasing an insurance policy
- Obtaining business licenses and certificates
One possible way of circumventing this is to purchase an already existing bona fide legal entity or lending franchise. For example, the largest franchise lender in the US is Liquid Capital. The short-term costs may run a bit higher, however, the long-term benefits of using an existing household name could potentially pay large dividends.
In addition to the unique requirements for lending entities, regular business costs will often crop up as well. Among others, these could include hiring and administrative overhead and office rental. On average, these costs could take anywhere from 10%-12% of your startup budget.
Point Two: Raising Funds
Raising capital to lend out is the primary operational challenge for any lending startup.
Usually the best way for a startup to begin lending is with their own capital, but when that is not possible (or favorable) funds can be raised in the marketplace. Recently, institutional lenders have become much more comfortable with providing capital to lending startups following the rise of the P2P model.
Any lending company funded by public investors will have to factor in the cost of hiring a Certified Public Accounting firm to perform an audit to certify all financial data including their business plan, valuation, and other financials.
Point Three: Using the Right Technology Platform
The core of any modern lending company is the technological platform it runs on. The platform is the brain of the business and takes time to nurture and grow. It is best to do this in parallel with the other points as it is the primary capital asset of the operation.
When it comes to platforms, there are two main options: building your own from scratch or purchasing an existing platform from a vendor. This crucial decision will have a long-term impact on the business and will greatly affect setup and operational costs. Each option comes with pros and cons:
- Building a lending system from scratch is more time-consuming, and can take up to 12 months. It requires a substantial upfront investment as you will need both financial and technological expertise to pull it off. Additionally, time-sensitive shifts in the market could be a factor, so timing your release is of paramount importance. While this option could be risky, it gives lenders full control over the product they build.
- Purchasing an existing lending platform is generally less expensive and faster. There are a wide range of solutions both out-of-the-box and fully-customizable. The options fall into two general categories: traditional core banking systems (eg. Oracle, Temenos, and Infosys) or fintech-focused solutions (eg. HES Lending Software).
There are number of software challenges that digital lender should consider when choosing a platform:
- In order to optimize productivity, systems often require further customization.
- Some systems only cover a single or hand-full of loan management aspects like underwriting, loan origination, or loan servicing, and do not support many back-office functions.
- Systems often do not integrate with the majority of third-party services, so lenders might end up needing to mix and match software to run their business.
- Some systems do not extend well into new markets or product segments.
- Some systems require license upgrades to increase the loan volume or number of user accounts.
With a good understanding of the industry, thorough planning, and about $200,000 to $1,000,000 of startup capital, a state-of-the-art lending 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 for improving the lives of the borrowers and their communities.
Natalie Pavlovskaya is the Chief Marketing Officer at HES (HiEnd Systems), a fintech company behind comprehensive lending and credit scoring solutions. She is a Marketing Executive with international business experience in CIS, EMEA, and US, working for more than 7 years in digital marketing.