Managing Loan Acquisition Projections

This time on the PayPlan blog, we have something special for you! Sit back with a cup of coffee and watch a workshop with Nathan Rea, the VP of Strategy and Growth. Learn about marketing and lending projections, and get a walkthrough of a robust spreadsheet (we love ‘em!) that can help you quickly make the math work in your favor!

Understanding the individual variables involved in a sales funnel, including marketing and lending, is a necessary but frustrating step in any endeavor. It allows you to accurately project the money you’ll spend and, more importantly, the money you’ll earn. That’s why Nathan spends time with every client to crunch the numbers and find a path to success. It’s easier to hit a target when you have one in mind, not just shooting in the dark and hoping for the best!

Because this walkthrough has strong visual components, your best bet is to watch the video. However, we have the transcript below if you’d prefer to read along. 

If you’d rather just have Nathan walk you through your numbers right now – schedule a consultation with Business Warrior today and experience how we help lenders become more profitable and grow their portfolios!

Book Your Consultation Today

Video Transcript Begins — 

Hello everybody, my name is Nathan Rea and I'm the Vice President of Strategy and Growth here at Business Warrior where we help lenders grow their portfolios and become more profitable through the use of lending technology and marketing. 

So today we're talking about one of the most important topics that we have when it comes to growing a healthy and profitable loan portfolio and that is managing projections on loan acquisition and portfolio performance after you acquire those loans. To have a loan portfolio, you obviously need to acquire loans, and then you need to understand how those loans are performing in your portfolio. 

Most importantly whenever you're entering into the market or, you're making changes to a product or you're doing anything regarding your lending business. You need to be able to accurately make projections and then you need to be able to manage your performance against those projections so you can see that you are on track to get the sort of capital returns that you are looking for.

Here at Business Warrior we have a couple of different tools that we manage this. And we typically onboard and run lenders through these tools when they are working with our marketing services department or when they're working with our technology department.  And then when they're working with both then we do both sides of the projections that we're going to look at here today.

When we’re thinking about projections there are two particular areas that we need to focus on. One is our marketing projections. And that is breaking down the marketing funnel into the stages that are necessary to acquire and fund a loan and understand individual funnel performance at each stage on there., and at the end of the day, understand what does it cost us to fund a loan for our vertical in our space? And then after that, how do our actual loans perform once they are in our portfolio? 

And at the end of the day, what we really want to know is what is our end return on investment? How much cash is going out and how much cash are we returning? 

We break these things down into two specific steps and then we use some tools like what I'm going to review here today with you guys to be able to manage those projections.

The cool thing is with tools like this, they help you set a baseline so you can know what you're going to be looking at as you're entering into the market and project your performance out over the course of 12 months and also be able to project your cash flow out which is very very important too.

Then two, these tools help you play around with some of the inputs. So that you can understand the underlying math behind getting your portfolio to the level of return that you want to get it to.

Obviously, a 1.03% return on your capital is not very good. You want to be outperforming that number pretty heavily. So what does it take to start cranking that number up to 1.5, 1.6, 2.0.? We can actually go over all of that when we have some really tight projections to be able to understand what KPIs we need to be hitting on and most importantly project those KPIs out into future performance.

So with that being said, why don't we go into this specific set of projections that's kind of set up for one specific type of lender and you guys can kind of see how all of this functions when we pull it together.

In this one right now we are looking at lender who's doing what we would consider doing short-term lending, probably cash advance and what we're looking at is specifically some projections in which we are combining keyword research and traffic acquisition through Google paid search. This can also work for  if you're working with affiliates, you're working with lead markets, if you're working with meta, if you're doing email or we can combine all these projections in depending on the traffic channels that you're looking at. But for today for simplicity's sake we're going to look at just one media channel and that's going to be Google search.

So this is a sampling of keywords that are coming out that are relevant to this vertical right here. And then obviously we have our top-of-page bids, both the low and high range. And what we're going to do is out of our keyword portfolio. We're going to have an average CPC for the top of the page. This is going to be on the high end. So we do a little math in here to understand what our average CPC for the campaign is going to be. And for this loan product and this vertical, we're projecting out $6.72. Now obviously everything that's going to flow through this campaign is going to be a function of your media budget or how much you are paying in marketing in order to generate traffic through the individual media channel that you're working on. In this one right now, we are having an input of $10,000 per month. 

But as you can see, this is going to be a variable that we can play around with, I can bump this up to 50,000 and see what my projections look like. And this is going to pull all the way through into the spreadsheet. So as I'm adjusting my monthly media budget, I'm going to see my marketing spend projected out over the year. I'm going to see my total marketing spend and then with the total cash out that I have because this is going to also impact how many loans or deals that I'm funding at the end of the day and at the end of the month and at the end of the year. I'm going to bump this number down to something more like… let's do a nice reasonable budget. Let's start off with $25,000 per month. I have an average CPC. Now I need to understand the typical funnel that I'm going to use for this loan product.

So for this one we're going to be driving traffic to a landing page and we're going to have to convert the traffic into leads. After that we are going to have a qualification rate. So of all our leads, what percentage of these leads are we going to pre-qualify? Then give them pre-qualification offer and then get them into our loan origination system and start actually getting them to complete their app and move them towards funding.

And the reason that we typically do a pre-qualification step for a lender like this is because we want to weed out unqualified borrowers as early as we possibly can in the process because this is going to help a lot of the other variables that are going to impact my end of the day performance. One, I don't want to be paying to run credit checks and income verification and anything else that I'm running in my workflow and in my underwriting processes for people I know aren’t going to be qualified. So let's get them out early significantly drop down my underwriting cost per app. Plus it's going to help me generate better conversion data for my app platforms.

So here we're just kind of plugging in some placeholder, what we see as like industry standard rates for some of these. Each one of these conversion steps, though some of these are actually a little bit higher right now. So I'm going to bump a couple of these down, and we can see what that ends up doing to the projections.

I now have a landing page conversion rate of 10.65% and off of my $25,000 media spend that's going to end up in me generating about 396 leads over the course of the month for a cost per lead of $63 dollars. And now I'm just going to keep working the funnel down and weeding away a little bit more on each one and getting towards an end cost per funded loan for this particular marketing funnel that I'm running. A qualification rate of 52% of those 52 71% start my application after I pre-qualify them. 50% of them complete my application. Of those 50% and 70% are receiving an offer. So I'm running my automated underwriting of all of the ones that I've sent over 70% are going to receive an offer of those  78 are going to select an offer and of those 78% finally, I'm going to fund 80% of those. So what this gives me off of a spend of $25,000 per month is a 32 funded loans for a cost per funded loan of $783.

And the cool thing is you can start playing around with these funnel steps right here as you're managing your projections. You want to be a little bit more conservative. Let's say that you start off with an 8% conversion rate on your landing page. You can see the math is all going to run here. So suddenly, my cost per funded loan is at $964. And my total funded loans in this month is going to be 26. Most importantly, all of this is running through the portfolio math too. And I can look as I'm playing around with these numbers on my projected return on investment over the course of the year for the numbers currently in my marketing funnel.

And this guys, is really really powerful because there aren't a lot of tools or companies or marketing agencies or lending software products that are helping you do some of this math of seeing 12 months out. “Here's what all the money I'm going to be putting into this. What am I projected to get out at the end of these 12 months and even looking forward from there?” And most importantly, “What KPIs do I have to hit to make sure that this number is one that I'm comfortable with, and that's going to be returning me money.” Because you can see right here, 8.65% out the gate. I am not going to be getting a good return on my investment, I'm actually going to be losing money. But you can also see if I pump that up to even 9%, 9.65%, all of a sudden that might break even and there's so many other areas for me to optimize my performance to really get that number kind of into gear.

So our traditional funnel, our break points for each one of those are all going to pipe into our actual lending projections. So that marketing spend that I sent in my previous tab is now going to pull through here over the 12 months. And obviously you can scale this up if you want. You can start ramping up if you want, rather than have you're marketing spending in month six is actually going to increase by 30% or something like that.

So I'm going to. Just do a little bit of math on the fly there. Boom. And then maybe you're going to keep scaling it up actually a little bit over the course of the year. So you can even see what's going to happen there. “Ooh, my return. That's going to be really bad.” But you can see I'm putting a lot more money. I'm going to have to adjust a couple of my numbers in here. Um, but this is the really cool thing about having a really good projection system is you can input these numbers and see what the impact is going to be here.

I'm going to roll back all of those changes I made there. So we can just have a nice steady projection that we're running through.

So all of these are, these are pulling in the monthly break points that I had in my previous spreadsheet. So I can see how many funded deals I'm getting based off of the marketing KPIs and break points that I have in my initial tab. From here I- and I need to establish what my average loan size. So in this one we're doing um short-term lending maybe for independent contractors or something like that. So I know that my average loan size is going to be around $4,700 and my gross payment rate- which I'm projecting right now is going to be around 1.35. The gross payment rate is obviously a roll up of a bunch of other metrics that are going to be existing underneath that. It's going to be your default rate, your interest rate, all of these other things. But really you're looking at- a cohort level on a monthly basis. Out of my loan origination, how much am I collecting off of that? So we're just simplifying things a little bit here. Obviously you can't have much more sophisticated math running behind this.

So a gross payment rate of 1.35. This math is going to project into here now. So, my average loan size $4,700, that means that I'm going to be funding $136,041 of loan origination on a monthly basis, projected over the course of the year. And my gross payment rate is going to be 1.35, and all of this you can change here too. So you can see at a 1.35 amount 1x. What if I just increase my gross payment rate a little bit, 1.45 and I increase my average loan size a little bit. All of a sudden I'm at 1.10x which is a much healthier number that I'm pulling through here. So you can see your total loan origination on a monthly basis. Your return off of all of that, and most importantly you can project your cash flow here.

So I'm projecting my terms on these loans are going to be for 4 months. So I'm going to be collecting $59,000 month 1, $119000 month 2, $179,000 month 3. Boom all the way across the board there. And then obviously you're going to keep collecting a little bit after that.

But this is going to be some rough projections for you there. And then you're going to have your marketing spend. Your total origination. Your total spend, which is a combination of your marketing. And your origination. And then after all of that how much you are getting repaid. How much you are collecting on that portfolio, or on a monthly basis. So this is to date to. You can see right here I am in month seven. I am at: $1.329 million in spend which is a combination of my origination and my marketing. I'm at $1.315in collections so I'm still negative on my return. But next month I'm going to be positive all on all that. So I'm going to start having some positive cash flow here. 

Next you can kind of see, project it out over the- of course of the year, not a great number. My cash out is $2.2 million. My cash in is $2.5 million. You know that's actually some decent profit in there, because this is including my marketing spend. There are obviously other costs that you're going to have in there if you're using a modern loan origination system, loan management system, decision engine. So if you're using modern loan software you're going to have some SAAS expenses. You're probably going to have your operational costs. So you're going to have to factor all of that in there. But a lot of this you can start outpacing your hard costs just by increasing your marketing spend to increase your total volume. My total cash return there is $2.5 million. But what if I start increasing my marketing spend rather than being at $25,000?

I'm going to be at you know let’s double to $50,000. Now I have a total cash return of $5 million.

So you can see I'm up about $450,000. Obviously much easier to cover your hard cost or anything else that you have going on for that. But most importantly, these are some numbers that we need to be playing around with because there's a lot of room for improvement on this funnel right now with some good marketing I can increase my landing page conversion from 9.6% to 11.6%. I can improve my qualification rate from 52% to, let's still be cautious. Let's go to 58%, and I can get 75% of my qualified uhm pre-qual applicants to start the funnel.

I've made these changes in my marketing. Now all of a sudden you can see my return on investment is up to 1.15 and I'm up almost $900,000 on the year for the, this portfolio right now. Uhh my marketing spend is increased but all of my other metrics have increased as well. But most importantly like if you can stick, start pumping your gross payment ratio up to 1.15. And maybe your average loan volume just adds another $200 or something like that.

You can see how you can quickly get the math to be working in your favor. You just have to understand all of the individual variables that are part of marketing and lending to be able to accurately do those projections. Then use a tool like what we use here when we're onboarding new lenders to make sure the math is going to work, you understand the specific KPIs that you need to hit, and most importantly, the loan product that you are putting out in the market is going to work for the market, and you're working with realistic numbers is the inputs into your projections. 

If you guys have any questions? We love to kind of run lenders through exercises like this if you're struggling to do any of your projections on your own. Just go ahead and contact us and we would love to talk to you. 

Thank you so much guys. Bye.