One of the most important aspects of fintech lending to both borrowers and lenders is how the loan is evaluated. Here at LendingCrowd this process is taken very seriously and our Credit Team manually checks every application on an individual basis.
For borrowers, it is essential that they know their loan application is being assessed fairly. Lenders want to ensure that the credit assessment is robust enough so they can trust the risk band and are in turn able to make informed decisions that reflect their risk appetite.
The assessment can be summarised in these six easy steps:
1. Initial criteria
We review the application to make sure that the borrower meets the initial criteria. These are that the business has been in operation for at least two years and has a turnover of approximately £100,000 or more. If the business does not meet these first criteria then we do not continue with the application. Additionally, if the applicant is a limited company or limited liability partnership then the name is verified with Companies House. This is to ensure that the business exists and that there are no irregularities such as the company being dissolved.
2. Financial information
We first request the last two years’ accounts and this provides us with a three-year history. This allows us to carry out trend analysis identifying any early warning signs, such as year-on-year decrease in sales or profits. As this is historic information we also look for management information in most cases, which provides a more up-to-date picture. Anything found that looks out of the ordinary is discussed personally with the borrower.
Depending on the size of the business and the purpose of the loan, for instance, it may be for expansion, then projections will be requested or be included in a business plan. We then incorporate this into our affordability model to ensure that the business can afford to repay the loan from the cash that is generated through trading.
All current credit obligations of the company are taken into consideration when assessing the affordability of the loan. Also if additional finance is being sought from another source at the same time then it will be included in the model.
3. Credit checks
We use a credit reference agency to carry out credit searches on the businesses and the owners, including shareholders with large holdings. If there is evidence of any defaults or county court judgements these are then discussed with the borrower to establish the reason behind them.
4. Risk band
When calculating the risk band we look at the management behind the business – what experience do they have, how long the business has traded for and the industry it falls into etc. Some of this information is obtained from the application, some from our own research process and the rest from the conversations we have with the borrowers. It is helpful if a business plan has been provided as this usually provides an understanding of what the plans are for the business and often how good the management is.
We have developed an in-house risk band modeller called ExpertLender, which is based on the knowledge and experience that our Credit Team has gained through SME credit underwriting over the years. The Credit Team evaluates all the information provided and then ExpertLender is used to calculate the risk band.
Once we are satisfied that the risk band is suitable to put the proposed loan on our Loan Market security is then considered.
In the case of limited companies and limited liability partnerships, a Bond & Floating Charge (in Scotland) or a Debenture (in England and Wales) is considered to gain some form of security for the loan.
If a guarantee is taken from a director or third party who is willing to provide one to support the business in getting the loan an assessment is carried out to ensure that the guarantor has sufficient worth to meet the obligation.
If it is a sole trader or partnership where a guarantee is usually not required because they are liable in their own right we still assess their net worth to ensure that they would be able to repay the loan if the business failed.
Identification checks are carried out on all borrowers or significant shareholders within a business to ensure that they are who they say they are to prevent against fraud or any other matters that might arise.
And that is how we evaluate every loan application that we receive. If you have any questions, please get in touch through our contact us page and we will get back to you as soon as we can.