Keeping customers coming back is an ongoing battle for every business, no matter their size or sector. As well as generating steady profit, a solid list of loyal clients reduces the need for consistent and costly marketing campaigns.
But private lenders face unique challenges in this area. After all, depending on the types of loans you offer, once the term is up and the capital is repaid, it’s unlikely a client will be rushing to take out another loan any time soon.
So, how do private lenders ensure clients return when our services are so often needed sporadically?
The answer to this question does not lie in the price-focused strategies many lenders first flock to. Poring over profits and deliberating how you can bring your rates down to a more attractive number may work in the short term. But long-term retention will require a much more holistic approach.
Why Private Lenders Struggle to Retain Clients
Unfortunately for some lenders, there are business plans that simply do not mesh with a goal of client retention. In fact, many private lenders unknowingly undermine their chances of generating repeat business by falling into some common traps, like:
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One-Time Transactions
Personal loans and mortgages, for example, don’t require significant starting capital and have high interest rates, making them an attractive option for newbie private lenders. However, once Mr and Mrs Smith have purchased their new car or house and paid you back, they won’t be returning any time soon. The borrower’s need is met, the loan is repaid, and there’s no immediate incentive for them to take out a new loan. This is why lenders offering these ‘one-time transactions’ retain only one of five possible clients at the point of purchase.
This is why diversifying your loan products as soon as possible, if not transitioning entirely away from loans with a tendency to be one-time transactions, is vital to building a portfolio of repeat clients. We’ll take a closer look at how successful private lenders do this later on.
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Rigid Customer Service
According to the Association for Financial Counseling & Planning Education, two of the main reasons why people actively choose not to use major banks are transparency and trust. When it comes to loans, major financial institutions may have hidden costs abound for late payments, and are more than happy to throw their customers into hours-long phone queues before important discussions. Private lenders plug this gap in the market. So why do you adopt the same one-size-fits-all approach as banks?
Ease of operation is understandably attractive to private lenders. A borrower selects the loan they want and your practice puts in motion the tried-and-tested process of paying them out. But this approach leaves you in direct competition with banks, and will eventually push away borrowers who require a more personal approach.
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Failure to Invest in Technology
Speaking of long wait times in phone queues listening to madness-inducing hold music, private lenders often miss a trick when it comes to investing in technology. Sure, there’s something undeniably personable about being welcomed into your lender’s office or having a direct line. This people-first approach works well with those aged 65+, only 15% of whom use mobile banking. But what happens, for example, if your savvy 26-year-old wunder-borrower has hit a snag in their plans and needs to extend their payment term? Making them drive across town to speak with you, fill out extension forms and fax them over smacks of the same bureaucracy banks are infamous for.
Don’t underestimate how important it is to allow your borrowers to manage their loan through a clean and streamlined online platform. And before you mention all the reasons why a ‘faceless’ experience is damaging, know that it is possible and highly beneficial to balance in-person customer service with digital solutions.
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Of course, making major changes to your practice’s structure, processes, and day-to-day operations will be both expensive and disruptive. But, these changes will better position your practice to retain clients, and make your investments back tenfold. Take it slow and follow a plan.
The Viability of Client Retention Plans
Private lending is unique in that, since the aforementioned flexibility is vital to creating customer loyalty, you must assess and meet clients’ needs on an individual basis. As such, a catch-all client retention plan is a thing of fantasy.
The next best thing is a flow chart or decision tree that you can follow depending on the client you’re currently working with. Here are a few examples:
Is the client already a repeat client?
Yes - The borrower already has a level of trust and familiarity with your lending practices. Seize this opportunity to offer benefits and rewards for their loyalty.
No - If the client is new to your practice, a seamless onboarding experience will set the foundation for a long-term relationship. What you glean about their specific needs during initial discussions will allow you to create a customized lending solution.
Do they require flexible loan terms?
Yes - Discuss the various options you offer, from adjustable repayment schedules to interest only payment periods. Transparency at this stage will alleviate any client concerns about repeat commitments.
No - Highlight the advantages of predictable payments, as well as any fixed-rate options that suit your client’s needs. Stress that, even if they don’t need flexibility now, reassessment is always available.
Would the client rather manage their loan online?
Yes - Ensure they have access to a secure online portal where they can manage their loan, make payments, and easily communicate with your team. A ‘tour’ of this service from an experienced employee is another helpful add-on.
No - Focus on providing a personalized, high-touch experience. Schedule regular phone calls or in-person meetings, but stress the ease and efficiency of digital communication going forward.
Does the client have any outstanding concerns?
Yes - Invite the client to share their specific worries about the loan, fees, or customer service experience. After addressing issues head-on, a follow-up will ensure their issues have been adequately resolved, and indicate how to support them in future.
No - Engage them in a conversation about their financial goals and how you can assist in achieving them. Invite them to join a client mailing list or to any events your lending service is holding.
Is the client willing to give feedback?
Yes - Encourage them to share their thoughts on what aspects of the lending process they found most beneficial and where they see room for improvement. Consider using surveys or direct conversations to collect this feedback systematically, and keep them in the loop with regard to changes.
No - Find out what concerns they hold about sharing feedback, and offer alternative methods like anonymous surveys that address these issues. If a client would still prefer not to share their thoughts, check in with them at a later date.
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A methodical decision tree that covers all steps in the lending process enables an increase in the chance of repeat business on a holistic level. When creating such a document for your practice, it’s worth outlining exact processes to follow depending on your clients’ needs.
Proven Client Retention Strategies
As we’ve seen, if you’re offering personal loans or mortgages, keeping your customer service rigid, and maintaining more ‘traditional’ methods of lending, only 20-30% of your clients will return. With these mistakes in mind, let’s discuss how private lenders can position their practices for success.
Product Diversification and Bespoke Customer Service
Some loan types are more conducive to repeat business than others. If you offer mortgage loans, consider fix-and-flip loans, buy-to-let loans, and commercial property loans. Depending on how you vet first-time borrowers, individuals or businesses seeking these loans are more likely to return to you as they themselves have an economic obligation to new projects.
Alternatively, rather than offering personal loans, suggest eligible borrowers open a line of credit with you. By their nature, these loans are ongoing, create a continuous relationship between borrower and lender, and give you ample time to demonstrate your practice’s superlative customer service.
And lines of credit do not have to exist as loans in and of themselves, as UK-based Private Finance has proven. After a client required further funds, they set up an overdraft of £900,000 ($1,200,000), allowing the client to “draw, repay, or reduce funds as required.”
Considering that a lender’s willingness to offer bespoke products has a direct impact on their clients’ loyalty, adapting to clients on an individual basis provides value that they would never receive from a bank, and likely won’t get from other private lenders they have not worked with before.
Balancing Traditional with Digital
Embracing technology should not mean sacrificing personal interaction. The most successful private lenders use digital tools to enhance, not replace, their customer relationships. As Kristina Rogers, EY Global Consumer Leader, puts it:
“Three things matter [when offering digital tools to clients]: trust, respect and value. Can people trust you to use technology responsibly and safely? Do they feel you are using technology to help them, or to take advantage of them? Is the value they get from an innovation fair, considering how much your business benefits?”
Where online lending management is concerned, trust, respect, and value for the client are inherent. With 78% of American adults preferring to bank online, the adoption of this technology is no longer a next-gen innovation; it’s essential.
But technology adoption is not just a client retention strategy. It can also help private lenders scale their business, as one hard money lender found when they began working with document-upload platform FileInvite. Their commercial lending software allowed their borrowers to efficiently upload documents necessary for due-diligence, freeing up time in face-to-face meetings to discuss clients’ intended journeys, and solidify their position as a vital partner.
Why You Shouldn’t (Always) Focus on Price
Any business needs a pricing strategy, and capital cost lies at the centre of our business as it does in no other. Many lenders opt to offer discounts to new customers to entice them in. A valid strategy, but not one that offers the priority borrowers require if they are to return. Other practices price competitively, making them the only choice in terms of affordability, if not always in terms of quality.
But consistently decreasing rates and extending payment terms to entice clients to return is a poisoned chalice, leaving you with thinner margins and attracting clients who are focused only on finding the cheapest option. These borrowers will jump ship as soon as another lender offers slightly better terms.
A race to the bottom on pricing devalues the service and expertise private lenders provide, and is the single biggest mistake made in our industry. The true key to retention lies in creating a relationship-centric experience that goes beyond the financial transaction. If your private lending practice is prepared for the future, anticipating client needs, providing value outside of loans, and becoming a strategic financial partner will matter far more than interest rates.
Sources and Resources
- https://www.jdpower.com/business/press-releases/2023-us-consumer-lending-satisfaction-study
- https://prisync.com/blog/pricing-strategies-new-vs-existing-customers/
- https://www.afcpe.org/news-and-publications/the-standard/2015-4/three-reasons-why-people-dont-use-banks/
- https://sinch.com/blog/5-examples-excellent-customer-service-banking-and-financial-services/
- https://totalexpert.com/definitive-guides/increasing-customer-retention-for-mortgage-lenders/
- https://axylyum.com/how-private-lenders-can-gain-more-borrowers/
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