Industry

Three Industry Trends in Nonbank Lending

July 21, 2024

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To stay competitive, nonbank lenders need to stay ahead of changing regulatory landscapes, mitigate emerging risks, and monitor shifts in the tech landscape like AI and security management. Let’s dive into three trends we see in our nonbank lending clients helping them stay competitive: co-sourcing, early LMS implementation, and institutional investor requirements.

Trend 1: Co-sourcing

The first trend we’re seeing with clients is the rise of co-sourcing.  Co-sourcing is a hybrid approach between in-house staffing and outsourced loan administration. With co-sourcing, lenders purchase their own technology platform and grant third-party loan administrators access to run the operations on the firm-owned platform. This provides lenders with more control over their data, as it resides in their tech stack. You’re scaling operations by having a third party handle day-to-day loan operations but with the security, access management, and accessibility of having your own, in-house, loan management platform.

The need for greater data access and control has sparked this shift away from outsourcing and toward co-sourcing, allowing firms to outsource work while keeping their client data in-house. Keeping data on your own Loan Management System (LMS) increases data security, simplifies access to reporting and insights, and lets you switch fund administrators if needed without the hassle of data transfers.

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Trend 2: Implementing an LMS Before You Think You Need One

All firms need to start somewhere when managing loans, and most begin with spreadsheets knowing they’ll eventually transition to a more scalable solution as they grow. But lately, we’ve seen potential clients come to us earlier and earlier in their tenure. These companies recognize the importance of transitioning from spreadsheets to an LMS early on to reduce manual errors, manage risk, and help them scale.

As lending operations grow, the volume of transactions, customer data, and overall complexity increases. Relying on manual processes and spreadsheets to manage a growing portfolio quickly becomes untenable. And, the longer a firm waits to transition to an LMS, the harder it can be to transfer data securely and train employees on new systems and processes.

It’s not just the headaches of late-stage implementation driving the move toward early LMS adoption. Firms like Pershing Ventures, a Venture Capital fund providing venture debt and financing capital to SMEs, see an LMS as key to proactively managing risk.

“You think firstly about credit and market risk, as key business challenges. Less obvious are the operational risks that can turn into a credit or market risk. Spreadsheets are inherently an operational risk,”

shared David Weiss, Pershing Ventures President.

Pershing implemented Hypercore early not as a reaction to risk, but instead as a preventative measure.

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Trend 3: Institutional Investors Require an LMS

As many of our clients are in growth mode, they’re looking toward institutional investors as a path to additional funding. Again and again, we hear from clients that institutional investors all ask one thing: do you have an LMS?

Why?

With an LMS already in place before they seek institutional funding, lending businesses position themselves as credible, reliable, and prepared entities worthy of substantial investment. Firms that wait until they need funding to transition from spreadsheets to a digital system of record are already behind their peers.

Pershing Ventures knew they needed to implement a loan management system early in their operations. Having Hypercore as their LMS in place as they prepared for a major funding round meant they could provide potential investors with portfolio visibility, streamlined reporting, and most importantly, risk management. And, an LMS does more than store loan information; it provides a reliable and efficient framework for decision-making, reporting, and risk management, all integral when taking on institutional investors.

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Conclusion

How might these trends help you in your organization? Co-sourcing helps get scale out of your employees while keeping data securely in-house; implementing an LMS early means you’re laying the foundation for future growth of your firm; and early implementation helps you should you seek institutional investments in the future. The key to staying competitive and growing in the industry is to remain proactive, keep your data secure, and look for opportunities to scale your operations.

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