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Understanding your customer base, from onboarding to underwriting

*Please note though that this is not intended to be an exhaustive list of the issues to be considered nor is it meant to constitute any form of advice to you. As far as we are able, we exclude all liability for any reliance you or any other party may place on the information and you should seek any specific advice that you feel is necessary to help you make an informed decision.*

1. Selecting your customer base

As a broker your existing model is all about finding customers but as a lender, you’ll want to be much more conscious of who you lend your money to – not every deal will be a good a one. As a lender you’ll need to have an Anti-money laundering policy and complete certain checks before you lend your money. And whilst you’re already used to collecting proof of ID and proof of address as a broker you will need to set your standards for address and identity verification and decide what paper documents you will accept or what electronic evidence is appropriate.

There are tools out there that help with Anti-money laundering and ensure you are comfortable with your customer and where their money is coming from.

2. Underwriting your customers

As a broker transitioning to a funder, you’ll need to switch hats and think that the customers and assets you take on will now become your responsibility – they will be yours. Again, it’s identifying your customer base and thinking who would you want to lend your money to and is the asset proposed a reliable and sustainable one? During the underwriting stage you’ll need consider what your appetite for risk is and where will you get the information on the Customer and the asset you need to make a lending decision on.

You will need to document a credit policy which explains where you will lend and on what terms. Funders offering you a block discount facility will want to see this document as it will help them understand what your book is going to look like as it grows.

Here are some questions that may help you frame your credit policy:

  1. Do you want to search the Customer? If so, which credit reference agency will you use, how do you set up an account and what are the costs?
  2. How will you inform customers/ gain their permission for searches?
  3. What information on the search will lead to a decline or an approval?
  4. What other information will you want to see before you lend your money?
  5. What would a good Customer look like? Years established, profitable trading, personal guarantees?
  6. Are there market sectors that you know and understand? Are there market sectors that you want to avoid due to the risk, reputational issues, personal convictions? For example, if you introduce a lot of commercial vehicle business and you know the assets and the Customers in that sector. Do you start there and expand your credit appetite as your book grows?
  7. Asset appetite and concentration- are some assets out of appetite? Do you really want to take on assets with no tangible security, new to market assets which may or may not have a resale value in 5 years’ time? If all your agreements are for commercial vehicles is that acceptable or is having all your eggs in one basket too risky? Understanding your risk appetite and staying within it may give you peace of mind.
  8. Do you want to underwrite the suppliers? If so, what is your criteria for an acceptable supplier?
  9. Agreement terms. Would you allow balloon payments, can you judge the security value of an asset against a balloon in 5 years’ time? What is the minimum deposit you need for it to be a good deal? Do you have a maximum agreement term for different asset categories?
  10. If a deal goes wrong, do you have disposal channels available or will you need to develop them? Do you have dealers who give you leads who would take assets back and sale on your behalf? This may influence your asset appetite