Businesses’ borrowing needs haven't been met for years. Even if they qualify for a loan, they probably can't wait for the 90-120 days it takes to get cash, which is the typical experience. The current setup doesn’t work - neither for borrowers nor for lenders.
Paper-based processes, manual work, customer information duplicated in siloed departments - none of it is conducive to customer-centric lending.
Our analysis shows that business lenders are spending up to 45% of their valuable time on loan monitoring and audits.
From collecting information about borrowers from fragmented sources and manually entering it into systems, to scoring based on Excel formulae, credit managers’ capability is limited - and prone to human error.
Only 35% of their time goes into the initial credit application analysis and loan approval, with a further 20% invested in loan preparation and onboarding.
During the pandemic lockdowns, lenders that had underinvested in digital loan monitoring and auditing capabilities found themselves in an impasse. In the first half of 2020, as a result of quickly deteriorating portfolio quality, they spent more than 80% of their time on loan monitoring and audits. This strain on resources resulted in high credit rejection rates and - for the lucky few who weren't rejected - significantly increased time-to-cash, at a time when companies needed funding the most. The burden on lenders still echoes today, when demand for capital is growing because of supply chain shocks and inflation. Companies across the world are facing the end of their cash runway, and they need funding to keep their viable activities going.
To understand why the industry is overloaded with loan monitoring activities, it’s important to clarify why monitoring is so crucial.
Here we look at the factors that contribute to the burdensome nature of monitoring work.
In our experience, three bottlenecks keep lenders in this self-reinforcing, vicious cycle that drains resources and keeps them from capitalising on market opportunities.
Source: Moody's Analytics
Even when this congested process ends with credit approval, the majority of lenders lack the tools and processes to ensure they can smoothly document, monitor, and report portfolio performance.
These are central challenges for lenders today. But they don’t have to - and shouldn’t - carry this dead weight into the future.
Loan monitoring workload increases exponentially when the loan portfolio is not doing well.
During periods of financial turbulence or crisis, lenders focus on ensuring the borrower is financially sound. They monitor and revalue collateral, they update internal risk limits, assess the prospect of covenant breaches, and communicate with financially distressed borrowers.
In effect, it leaves them stuck in this phase of the process that takes up most of their resources, with little room for loan structuring or servicing.
While adding more credit managers and portfolio monitoring officers to the team may seem like the right solution, this is a type of problem that hiring more people won’t solve.
Many lenders lack appropriate tools to source relevant credit monitoring and audit information or to generate timely alerts to track the early warning signs of a covenant breach. With no or limited access to meaningful and targeted portfolio analytics, it becomes substantially more difficult to carry out internal coordination and decision-making.
What's the answer?
Shortening the time-to-cash is not only possible but also achievable with data-driven lending. This is where Trade Ledger can add value.
Our business lending platform helps lenders take advantage of new data sources and automate manual activities, so credit managers can focus on more complex applications, driving more value through their work - and deriving more satisfaction from it.
With end-to-end lending orchestration, lenders aggregate real-time information used in monitoring internal limits and monitor it against the values specified in their credit risk appetite, policies, and procedures. They can also organise and filter this information by product, geography, industry, and quality of portfolios, making it easy to have a global view and to deep-dive into specific areas.
Trade Ledger enables lenders to fully automate monitoring of all covenants which are based on financial ratios calculated from the borrower’s balance sheet, income statement, and cash flow characteristics.
While some information, such as key management changes or acquisitions, will always be monitored manually, we simplify and standardise data collection to remove bottlenecks, lower time/cost-to-serve, and increase both customer and staff satisfaction.
Source: Moody's Analytics
To build an efficient loan monitoring and auditing process, lenders must ensure the workload is adequately calibrated to the purpose. More specifically, monitoring frequency and depth should suit the type and risk profile of the borrower and the type, size, and complexity of the credit facility.
This is difficult to achieve for most credit providers, since manual processes and inconsistent use of data, tools, and benchmarks make it difficult to structure and tailor loans to these characteristics.
Using our lending platform, lenders can easily monitor early warning signs of declining credit quality. We enable them to carry out more frequent and in-depth reviews if our platform identifies a deterioration in the borrower’s credit and asset quality. At the same time, lenders continue to monitor borrowers in good financial standing and free up valuable analytical resources to tackle more complex cases.
The future of small and medium businesses - and the millions of jobs they create (more than two-thirds of employmentand the majority of new jobs) - also relies on making applying for credit faster, more effective, and more flexible. It's in the banks' interest too - there's a huge gap between what businesses want to borrow, and what banks are willing to lend. Lenders must become leaner by adopting technology that streamlines applications and automates the better part of lending decisions.
Post-pandemic lending has to be data-driven lending, as facetime between borrowers and credit providers continues to decrease. It might have been precipitated by lockdowns that made it impossible to meet in branch offices, but businesses also know that their business banking experience lags decades behind the convenience, ease and speed of personal banking.
To recap, the pillars that enable any lender to prepare for this future of high-efficiency, low-touch relationships with their (prospective) borrowers are:
We'd love to talk more about this. Do get in touch.