The trifecta of any successful lending program are:
- Cheap money
- Low cost of acquisition
- Great credit risk management
If you have two of these three attributes, you are on your way to greatness.
Cheap money is easy to find if you have scale. Before you get to the first $300 million worth of lending portfolio, you are slaves to expensive money and worse low advance rates (you gotta raise a bunch of equity to backstop the advance rate).
So, getting cheap money to lend out as a a start up is probably a no go. If any of my readers think differently, please leave a comment below and enlighten us.
The second leg of the stool is great risk management. This isn’t something you can solve with a clever risk model. It’s a collaboration between marketing, operations, risk management and most importantly executive buy in.
A well oiled machine with top notch risk a management (especially credit risk management) is hard to find but not impossible. You can hire a bunch of expensive risk managers (worth every penny by the way) or employ a team of data scientists (assuming you have data to begin with) and brute force your way to greatness.
Let’s face it, a de novo lending portfolio can’t afford a team of data scientists or risk officers. There aren’t any data to analyze.
That leaves us with point number 3, low cost of acquisitions. What does that mean and why is it important?
Well, one of the most costly parts of your profitability equation is acquisition cost. That is to say, how much did it cost you to originate a loan.
Let’s break it down further. Cost of acquisitions include cost of purchasing the lead, data cost that you incur to underwrite the lead and if you need to have an underwriter to adjudicate the lead, then you need to consider the human costs as well. These are all up front cost that you have to shell out before you see a single interest payment collect from your customers.
However there is a way to achieve low or zero cost of aquisitions. The way to do that is to align yourself your marketing channel. Case in point, point of sale financing.
If you are partnered up with installers, merchants, retailers, they will send you leads naturally. Why? Because you are helping them to finance their product and services and therefore make them more money along the way.
For example, if you are working to finance pool and spa installers for single family homes, these installers will naturally send clients to you. It’s a win win situation.
Until next time