The lending business has an allure to it that I sometimes find perverse. Many seem to view lending – especially microlending – as a fast, often lightly regulated way to get high returns. True, lending can be quite profitable but that profit can be elusive at best. Most new Lenders and many existing ones make serious mistakes that either retard their ability to have a predictable and stable path to revenues or prevents their businesses from being viable concerns entirely. Here are some of the mistakes made by Lenders and of course, some ways to avoid making them.
Mistake # 1: Making it all about the “benjamins”
Your business needs to make money and it is surely one of the reasons you got into business in the first place BUT it cannot be the only reason or even the main reason you are in the lending business (or any business for that matter).
The Problem: If you make it all about $$ you will quickly lose the drive for things like continuous business improvement, people development and the very drive to get up and show up each day. If all you want is a ‘benz’, then what happens after you get it?
The Fix: Start by truly looking inside yourself to find the things you really love – other than money. Understand that money represents value creation and exchange. Nothing more. So, what kind of value do you want to really create…and ultimately exchange?
Mistake # 2: Trying to raise capital BEFORE you start lending.
Unless your last name is ‘Rockefeller’ or you’ve been a Banker for some time you probably shouldn’t go out looking for capital before you start your business (don’t worry we’ll talk about raising capital for existing businesses in another article).
The Problem: No one knows what you can do. Not even you.The gamble is too great. You must play with your own money first.
The Fix: Demonstrate that you understand the fundamentals of a lending business and that you can identify qualified prospects and do so cost efficiently, convert them to borrowers, administer the loans and collect and apply repayments. Consistent performance even over a relatively short time can demonstrate competence and separate you from the pack. Capital will now be attracted to YOU.
Mistake # 3: Not understanding the business of lending.
Like everything you are likely to do in life, this lending thing also has its own ways. It has to be understood.
The Problem: Approaching lending as if it is just another business is a deadly sin. This is where the alluring mirage exist: you grab a calculator and you say “I lend 1,000 and charge 20% per period and wow, I just made 200 just like that. Wow!” This kind of thinking means you may still need a little more education and perspective on the business. (lots of helpful tools will soon be available in our Resources section).
The Fix: There are many resources across the internet that can help you understand finance. Here is one we like: http://www.wikihow.com/Start-a-Finance-Company
Mistake # 4: Lending Too fast.
Somehow we have convinced ourselves that the only true marker of success is simply “how fast can you do it?”
The Problem: Because you are busy doing things doesn’t mean you are getting things done. Someone way smarter than me said that but I don’t recall where I first heard it. Lending too fast – meaning growing your portfolio too quickly can be an existential problem. It can quickly kill your business.
The Fix: Give yourself time to TEST what works and what doesn’t work. Here at LoanCirrus we’re always testing – messages, website copy, pages, features and anything we think will provide insight. We are a learning business – always focused on understanding what you, our customers need. You need to see your entire business as a laboratory for the first 12 months. Ramp up your lending gradually so that you can assess risk, better understand customer behavior and can respond to their preferences.
Mistake # 5: Lending Too Much To Too Few.
So this is perhaps one of the most dangerous of all the mistakes as you are essentially allowing a handful of your customers to bring down your entire business.
The Problem: Invariably, a few friends or family members with outsized loans are usually, but not always, the early indications that you have this problem. The real problem here is your EGO. Yes, you read that right. Your ego is the problem – an average loan size that is 10x what it should be is the symptom of an outsized ego. When needy, desperate persons come to you at the apex of their need and often, their misery – it takes a certain temperament to remain level headed and objective. It’s not that you don’t know the right thing to do, it is that you do know yet you rationalize why its ok not to do it…just this one time.
The Fix: As quickly as you can get someone to make lending decisions other than you; get a Credit Manager/Underwriter or whatever you want to call the role (of course LoanCirrus (loancirrus.com) is perfect to help you manage multiple roles and permissions. Watch the amounts of each and every loan. If you are starting up, disbursements should be reviewed daily — amounts checked, audit documents to ensure compliance, understand your ratios, etc. A big part of fixing this is being aware of it and also understanding just how dangerous it can be when those oversized loans come crashing down as defaults and delinquencies. Ouch!
Avoiding these 5 mistakes is no assurance that you will make it but the odds are certainly improved. Enjoy lending because you provide capital to persons and capital is needed to create change in people’s lives. Now, that’s no mistake.
To your Success!