Join underwriting specialist Adam as he offers insightful tips for lenders on using Codat to enhance your credit risk strategies.
Meet Adam Vander Ploeg, underwriting expert
Meet Adam Vander Ploeg: an underwriting expert with a career spanning PayPal, Upside Financing, and Ampla. Starting as an underwriter at PayPal, Adam quickly rose to lead the Distressed Merchants Team, helping struggling borrowers find solutions during tough times. Later, he brought his expertise to startups, developing innovative credit models and policies to fuel sustainable growth.
With deep experience using Codat to streamline data collection, improve applicant experiences, and make smarter credit decisions, Adam shares his top tips for underwriters looking to get the most out of the solution.
1. Cash runway is the holy grail for fintech lenders
In credit decision-making, the holy grail of financial metrics is cash runway. This metric is particularly crucial for fintech lenders who often work with start-ups that may not yet be profitable, or have high cash burn rates. Start-ups often rely heavily on investor support to fund their operations, which makes understanding their cash position vital.
To mitigate risk, it’s important to thoroughly assess how much cash a business has available on its balance sheet. This involves examining their latest financial statements, bank account balances, and any committed but undrawn credit facilities. By analyzing their financial and banking data, you can estimate how long the company can continue operating under its current cash reserves and whether it can meet its obligations and repay its debts when due.
This detailed analysis can help lenders make informed decisions about extending credit, ensuring they manage their risk effectively while supporting business growth.
2. Tailor your underwriting process to the credit product
Here’s the key advice for lenders aiming to refine their underwriting models: tailor your underwriting to fit the specific risk of your product, whether it’s a term loan, line of credit, or business credit card. Each credit product demands its own unique underwriting approach, as the risks and returns associated with them can vary significantly.
Consider a merchant cash advance, for instance. An applicant might not be turning a profit or have stable revenue, which at first glance might seem risky.
However, if they can sustain operations for the loan’s duration and demonstrate potential for growth, that’s sufficient to embark on a short-term partnership with the merchant. This partnership can help them scale and meet a short-term need, ultimately benefiting both the lender and the borrower. By understanding the nuances and potential of each product, lenders can make more informed decisions and foster successful client relationships.
3. Use Codat to drill into payment history
One unique advantage of using accounting data over just banking data is the ability to is the ability to access customer invoices and bills. With this access, you can uncover valuable insights into vendor terms, repayment frequency, and the percentage of on-time versus late payments.
Imagine having the actual payment history at your fingertips, rather than relying on traditional financial metrics like days payable outstanding, which require rough estimations. This allows you to instantly determine the percentage of payments made on time, identify any late payments, and see by how much they were delayed.
“That’s something you can’t get when you’re only looking at accounting data versus banking data that you can get with Codat.”
This crucial insight offers a clearer picture, empowering you to make more informed decisions.
4. Improve efficiency by focusing on the “need-to-haves”
To make underwriting more efficient, it’s key to clearly distinguish the “need-to-haves” from the “nice-to-haves.” The “need-to-haves” are the essential components required for informed decision-making, such as critical financial data and risk assessments. These elements form the foundation of any underwriting decision.
Conversely, the “nice-to-haves” offer supplementary information which can provide additional context, but don’t significantly influence the final decision. Understanding the difference between these two categories is crucial because it allows you to concentrate on what truly matters, avoiding distractions and streamlining the underwriting process.
5. Shore up your credit policies early
If I were launching a new capital product today, my top priority would be establishing a robust credit process from the outset. I’ve observed failures in credit processes when there’s excessive focus on rapidly driving revenue, often at the expense of acquiring poor-quality loans that can cause problems later.
“To safeguard and strengthen your credit program, it is crucial to develop a strong credit model and policy from day one.”
Plus, keeping your operational standards high is crucial. Make sure you’ve got a solid policy for managing origination and your portfolio. This way, your loan book stays secure, and you won’t find yourself having to suddenly stop lending because of a decision that’s come back to haunt you.
Enhancing your underwriting process with Codat
We help lenders enhance their underwriting by giving them easy access to customers’ financial data, so they can make more confident credit decisions.
Borrowers can share data with you in just a few clicks, and we’ll seamlessly connect you to their bank accounts, accounting systems, and commerce platforms. This allows you to cut out painful processes, increase borrower conversion, and reduce default risk.
To experience firsthand how Codat can enhance your underwriting process, get in touch using the form below.
