Doing Business in Nigeria: Lending Series.

Article 3: Lending Models

It is good to be back!

You will recall that in our last article we examined a couple of "federal" licenses that can power a lending business in Nigeria. We also delved into the regulatory requirements for obtaining these licenses, and their respective permissible activities.

In this article, we will be looking at some (popular and some not so popular) lending models.

This is probably the best time to say this:

This article is for informational purposes only and should not be considered legal advice. The information contained in this article is not intended to create, and receipt or viewing of this information does not constitute, an attorney-client relationship. You should seek legal counsel before taking any action based on the information contained in this article.

That is out of the way, so now, what is really a lending model?

A lending model is a business framework created by a lender for originating, underwriting, and servicing loans. It refers to the way in which a lender generates revenue, manages risk, and operates its loan portfolio.

Because your lending model greatly impacts the success and profitability of your enterprise, you want to get it right!

Quick one:

I have struggled greatly with how high-level or low-level I want this article to be. I even considered oscillating in-between. I am not sure a LinkedIn publication is the best way to go in-depth, but let's face it, nothing beats reaching out to a lawyer, eh?

So here are some lending models:

1. Peer-to-Peer (P2P) Lending

Under this model, you create a platform that connects borrowers with lenders, who then fund loans directly to the borrowers. In this chain, your activities include (but are not restricted to) creating the platform for connecting borrowers with lenders, vetting these borrowers and servicing loan after disbursement.

2. Invoice Financing

Under this model, you create a financial product that allows businesses to receive an advance payment for their outstanding invoices. This provides the businesses with quick access to cash, which can be used for day-to-day operations, growth, or to cover unexpected expenses, whilst the recover the outstanding invoice either directly or indirectly for a fee.

3. Buy Now, Pay Later

The buy now, pay later (BNPL) lending model is a form of consumer credit that allows customers to purchase goods or services and defer payment until a later date.

BNPL lenders offer a flexible and convenient payment option for customers, allowing them to spread the cost of purchases over time. The model also provides lenders with valuable data on consumer behavior and spending patterns, allowing them to better understand and target their market.

For lenders, the BNPL model carries several benefits. First, the ability to offer a flexible payment option can help increase sales and customer loyalty. Secondly, BNPL lenders often receive a fee from merchants for each transaction, providing a steady source of revenue. In addition, BNPL lenders may also benefit from the collection of interest or fees from customers who carry a balance past the agreed-upon due date.

As with all lending models, there are also risks involved. BNPL lenders must carefully manage the credit risk of their customers, as a high rate of default could negatively impact their bottom line. In addition, regulatory scrutiny of BNPL is increasing, and lenders must ensure that their business practices comply with applicable laws and regulations.

4. Merchant Cash Advance (MCA)

Under the MCA model, you provide short-term working capital to businesses based on their future credit card sales. This lending model is attractive as it offers a flexible and quick way to access working capital without the need for collateral or a traditional credit check. The MCA is structured such that the lender advances funds to the borrower, and then receives a portion of the borrower's credit card sales as repayment. This creates a mutually beneficial relationship as the lender receives regular repayments while the borrower benefits from a quick source of working capital.

Lenders operating in the MCA model benefit from the simplicity and speed of the application process. They can typically make funding decisions within a few days and disburse funds to borrowers quickly. This lending model also offers higher returns compared to traditional lending methods, making it an attractive option for lenders looking for higher yield investment opportunities.

However, the MCA model can also be risky for lenders, as they are dependent on the borrower's credit card sales to repay the loan. Lenders must carefully evaluate the risk associated with each loan and implement measures to manage and mitigate that risk.

5. Traditional Bank Model

Banks typically offer loans using their own funds or funds obtained through borrowing. They are responsible for loan origination, underwriting, and servicing, and make money by charging interest on loans and fees for services. This model has been in use for many years and remains popular due to the stability and reliability of traditional banks. Banks assess the creditworthiness of borrowers and make loan decisions based on their ability to repay the loan. This lending model provides a secure and regulated environment for borrowers and lenders. However, it can also be restrictive and time-consuming, leading to the development of alternative lending models.

I will close the (proverbial) curtains here by stating that the lending industry offers a variety of models to meet the needs of borrowers and lenders. Each model has its own unique set of advantages and disadvantages, and the choice of model can greatly impact the success and profitability of the lender.

In our next article, we will be examining responsible lending practices and how they impact borrowers and lenders. By exploring the various lending models and the practices that govern them, we aim to provide a comprehensive understanding of the lending industry. As we come to a close on our Lending Series, I am excited to continue sharing my insights and expertise in this exciting and rapidly evolving field.