Are you in the lending business? How do you decide if a borrower will be able to pay off the dues on time? When does a loan gets approved and when does it not? Being in the lending industry is tough. You need a conviction as hard as steel. You need to be smart with your decisions and witty with your comebacks. You need to constantly remind yourself that this is business, not charity. That being said, what rules do you follow to make sure that your lending business will not fail because a borrower cannot fulfill their obligations?
You need to use risk management analytics to ensure that you are going to get paid. As you understand the risks you need to make whenever you approve a loan, that also empowers you to measure the probability of getting back the amount that you have lent. Analyzing the customers’ behavior and history will save you time, energy, and resources. The results of the analysis will allow you to target the right customers, choose the loans to approve, and monitor or anticipate the risks involved in your decision.
Identify the Risks
First, you have to distinguish the risks you are taking. When getting into the lending business, you know that there’s a possibility you won’t get paid. You will lose money and capital. You might not have the legal grounds to come after the borrower. What happens if the borrower dies? Who will pay the loan? Identifying the risks will give you a rundown of what’s involved in this kind of business. It also helps you decide whether the risks involved are worth taking.
Now that you know the risks involved in such a business, it is time to analyze the possibility for these scenarios to happen. What’s the background of the borrower? Look at the credit history and mortgage payments. Do they make payments above the minimum due? Are they on time with their payments? Have they taken another mortgage on their house? How much is their total debt? This is also the best time to analyze the impact of the risks on your business in case the borrower fails to pay. Is it worth taking the risk?
Plan the Response
How will you respond to the crisis? If the borrower fails to pay, will the positive outweigh the negative? If there is a probability that the borrower is able to pay only half the principal amount and interest, will you have profited? What kind of terms will be suitable for the borrower? The regular terms applied to your usual borrowers may not have the right effect on this particular borrower. You can create a new term that will allow the borrower to pay off the loans. It’s a win-win situation.
Control the Risks
Finally, what happens in the future? You will encounter this predicament again. How should you respond better? You need to identify new risks that you will face and be ready for them. There’s bound to be quite a new risk involved in the lending business as lifestyles and policies change. Your knowledge today will be critical in determining the right course of action in the future.
In any business, managing and analyzing risks are an important step in reducing the chances of profit loss. Following these steps will allow businesses to flourish. These will also give businessmen the information they need to make wiser decisions in the interest of their business dealings.