Loan Origination Software

Small business financial institutions, such as credit unions and community banks, have their work cut out for them. Alternative lending companies are giving tough competition to traditional banks, making it easy for small businesses to get loans.

In a Credibly survey of SMBs, 62.5 percent of respondents said that they "did not seek a traditional bank loan before securing funding through alternative lending."

How have these lending companies gained an edge over the traditional banking systems? The answer is digitization of the loan servicing process.

Using a combination of tools, one of which is loan origination software, lending companies provide loans to small businesses more quickly, with turnaround times of just 24 hours.

SMBs can achieve faster loan approval rates since software can automate different stages of the loan servicing cycle: starting from the time a borrower applies for the loan to the actual funding.

Financial institutions that use software to automate their loan origination process can make faster decisions and gain an edge over their competition.

In this Buyer's Guide, we will look at the core features of loan origination software and understand how it can benefit your small business.

Let's get started!

Here's what we'll cover:

What Is Loan Origination Software?
Common Features of Loan Origination Software
What Type of Buyer Are You?
Key Considerations

What Is Loan Origination Software?

Loan origination software is a platform for centrally managing and automating different stages of the loan servicing cycle, i.e., loan application, document verification and credit approval, with automated underwriting.

For instance, during the loan application stage, the loan officer can add a borrower's details—such as income, credit history and assets—to the solution's dashboard. The software speeds up the whole process of fetching a suitable plan from the loan portfolio by automating it.

Dashboard view of loan origination software LendingPad (Source)

 

Using loan origination software, businesses can process and approve loans faster. The tool offers many features to help businesses achieve this.

Common Features of Loan Origination Software

The core features of loan origination software include an online loan application dashboard, loan portfolio management, document tracking and disbursement management.

Let's look at these in detail.

Loan portfolio management	Create and manage loan portfolios, including mortgage loans, commercial loans, and construction loans.
Loan application dashboard	Allow customers or loan officers to identify and apply for the right loan via an online interface embedded with tooltips.
Document tracking	Create a centralized repository of files such as loan applications and customers' income reports.
Automated underwriting	Build custom loan approval rules, automating risk and viability analysis, to make faster and more accurate decisions about a customer's creditworthiness.
Disbursement management	Approve a borrower's loan requests and track records of fund delivery via online payment gateways, checks and wire transfer.
Customer management	Capture and access details of new leads, prospects or existing customers in a centralized location.
Billing and invoicing	Generate invoices of loans delivered and payments received and share them with customers via email or SMS.

Besides the features mentioned above, these solutions offer mobile applications and integration with third-party tools such as accounting solutions. This allows businesses to expand the loan origination software's functionality.

What Type of Buyer Are You?

The right loan origination software for you depends on the size of your business and the complexity of loan portfolios you offer. Figuring out your needs and finding the features you need are essential in getting the best-suited solution.

To help you understand which solution you should choose, we've identified two types of buyers and their chief concerns.

Small business buyers: These buyers are concerned with the software's price and usability. The default choice is often cloud-based solutions over on-premise ones, as the former has a monthly subscription pricing model that's easier on the wallet.

In terms of features, small business buyers want automation functionalities that can reduce manual processes. These include centralized document tracking and automated underwriting for faster decision-making in the credit approval stage.

Having said that, the solution should also be easy to use. For instance, the loan application dashboard should be intuitive, with drop-down menu options and tooltips, allowing novice users to fill the loan form in minutes.

Enterprise buyers: These buyers need loan origination software that goes beyond loan process automation. In addition to advanced built-in functionalities, enterprises also need third-party integrations.

In terms of functionality, large businesses need customer relationship management (CRM), integrated payment gateways, analytical dashboards and advanced document management such as the ability to capture e-signatures.

As teams in such organizations use a variety of tools and processes, the loan origination software must integrate with popular CRM, accounting and project management tools.

For instance, an essential integration is with accounting software such as Quickbooks. This integration helps users transfer data, such as a historical record of loan transactions, from one system to another.

Best-of-breed buyers: These buyers are looking for specialized loan financing and accounting solutions. These tools come with customized functionality that help business meet industry-specific requirements.

Here are two types of best-of-breed loan solutions:

• Debt collection tool: The software helps financial institutions keep track of delayed payments and outstanding invoices. Helping business in debt recovery, these tools offer features such as invoice generation, automated follow-ups for payment due dates and documentation for Credit Bureau reporting.
• Mortgage CRM solutions: As the name suggests, this tool helps mortgage lenders in customer acquisition and loan life cycle management. The software has features such as client management, loan pipeline management, mortgage event alerts and integrated modules for compliance management.

Key Considerations

Loan origination is a part of loan servicing software, which belongs to the larger category of accounting and financial tools.

As a result, there are vast differences in the pricing, deployment options and features of solutions in this category. SMBs should carefully analyze their requirements before investing in a solution.

Here are some top considerations for buyers:

Evaluate features for any limitations: Loan origination tools have numerous features. However, you should carefully evaluate these features to understand whether they meet your business needs.

For instance, if you are a real estate financier, then it'd be important to be able to help your borrowers set up mortgage escrow accounts, which are accounts set up by the lender to pay for the borrower's property taxes and insurance premiums. While as a small bank, you might need the ability to create participation loans—a loan where a lead bank involves other banks for funding a loan—if a borrower makes a loan request beyond your lending limits.

Any basic loan origination software may have functionality limitations if you are a large financial institution. You might need extensive CRM capabilities, such as the ability to track client interactions over phone, chat, email and social channels, in your system.

In such cases, you need advanced loan servicing solutions. Check out our Buyer's Guide on this topic to find out more.

Understand software pricing: This requires awareness of the total costs of loan origination software. For instance, cloud-based solutions often come with sticker prices for different plans. But this frequently does not include future costs such as annual support fees.

This doesn't mean that on premise loan origination solutions are cheaper in the long run. Even if your small business has the budget for the upfront license fees, there are additional costs to consider such as hardware costs, third-party integrations and data storage.

That's why it's important to question loan origination software vendors about the total costs. Here's a list of additional fees you can expect when evaluating on premise or cloud-based loan origination solutions:

• Customization fee: Applicable for feature modifications, such as customized loan approval workflows, which may be required to meet your specific business needs.
• Data migration costs: Levied when you migrate data from an existing loan origination solution, server, in-house database or analytics tool into the new software.
• Training fee: Charged for “on site" training, in the case of on-premise, or “over the phone" training, in case of cloud-based solutions.
• Ancillary services: Applicable if you need add-ons in the form of third-party integrations such as integration with e-Signature platforms or accounting tools.