Lending

A lending business advances capital and earns the difference between its funding cost and the rate borrowers pay, less losses from those who do not repay.

Whether the loans sit on the company's own balance sheet or are funded by third parties is the single most important structural question in the model.

Income comes from interest, origination fees, late fees, and in some models from selling loans on to institutional buyers.

Profitability depends on three variables working together: cost of capital, loss rate, and cost of acquiring each borrower.

• Net interest margin
• Charge-off and delinquency rates by vintage
• Cost of capital and funding diversity
• Customer acquisition cost relative to loan lifetime value
• Proportion of loans held versus sold

Sound lending businesses show loss rates consistent across vintages, diversified funding, and underwriting that demonstrably outperforms generic credit scoring for their segment.

Any lender that has not been tested through a full credit cycle should be assessed with that gap firmly in mind.

• Balance sheet lending with owned capital
• Marketplace lending matching borrowers to investors
• Buy now, pay later at point of sale
• Revenue-based financing repaid as a share of sales
• Asset-backed lending secured against collateral

• What are loss rates by vintage, and how do they trend?
• Where does funding come from, and how committed is it?
• Has the model been tested through a downturn?
• What data drives underwriting, and is it proprietary?
• What regulatory licences does the business hold?