Lenders: differentiation doesn't have to be difficult

As lending software providers, we have a front-row seat to many lenders’ startup journeys. And there’s one part of setting up a new lending business that we see lenders overcomplicate time and time again, which causes them to delay their launch and spend money unnecessarily.

Product differentiation.

It’s hard to overstate the importance of differentiation for attracting and retaining clients.

I know from working in lending businesses how difficult prospects and brokers find it to choose between lenders. While growth in the UK IF market has stalled, the number of funding providers has stayed high. Most lenders sell themselves on similar, abstract benefits, like the strength of their relationships. Many of those benefits hinge on the lender’s reputation, which takes years to build. Others are caught in a race to the bottom, selling themselves on commoditised benefits like cost, highest first payment and time-to-cash.

The lender that offers a differentiated product therefore has an edge, provided their differentiation meets borrowers’ needs. And differentiation remains important in-life. Lenders must offer a range of product options to meet borrowers’ needs as they change across the funding lifecycle.

So where do startup lenders go wrong?

To plan what products they will offer in their new business, most founding teams start with a blank page. They map out their funders’ criteria, the information they require from clients and the fees they want to charge. Many draw up their lending agreements and SOP’s at this early stage.

This paints lenders into a corner. Teams use their product spec as a brief for their new lending software provider. If the software provider can’t match the spec, the lender must create a workaround or pay and wait for the software provider to develop the necessary functionality.

The launch of their business is delayed and the business incurs costs before it’s made money.

It doesn’t have to be this way

Specialist lending system providers like Dancerace have spent decades building lenders’ required functionality. As a result, systems like ours offer teams massive flexibility to differentiate their products using immediately-available features.

You can choose types of lending products or combine them to make hybrid products. You can configure your operational workflows, communication channels with clients, fees and tasks. You can tune your approach to debtor management, by controlling dunning and collections cycles. You control your approach to risk, building it into your operational processes.

The scope for business creativity is huge, with no time or money lost on building custom software functionality.

Differentiation done differently

When founders approach us about supporting their new lending business, we therefore advise them to take the following steps, in order. (Lenders with a system already in place can also follow these steps to choose their new system, but will need to adopt a ‘blank’ frame of mind to get the same amount of value from the exercise.)

First, we ask founders to discuss and document the objectives they want to achieve with their new lending products, both for themselves and their future clients.

It’s helpful to think about these objectives from three perspectives:

• What experience do you want to offer each client, to make them become an advocate for your business? Consider each stage of the funding lifecycle and your clients’ day-to-day experience of your service.
• What are your operational objectives? For example: keeping costs low, making decisions quickly, or ensuring your team is spending time adding value to clients and not unnecessary administration.
• What will your risk model be? For example: we encourage lenders to aim to deliver a light-touch experience to performing clients, with risk-score or event-triggered automated workflows and snap-in covenants.

Next, we advise them to go ahead and to do the ‘blank page’ exercise above, with the proviso that that they will treat this second document as a guide, not a spec.

We then suggest that founders take both documents – the list of objectives and ‘blank page’ exercise – and ask potential software providers to each create a new ‘blank page’ document that shows how the provider would meet the requirements in the original two documents.

Founders should then evaluate these proposals on the basis of ‘value vs. effort’ and ‘value vs. cost’ – with ‘value’ being determined by their list of objectives and original ‘blank page’ exercise.

A challenge shared

Implementing the right core software platform is one of many, many decisions you’ll make as a business founder. So, take a load off by approaching the software-buying process with an open mind, and engage potential software providers early in the process. We’re happy to share our experiences!