Understanding the Best Loan Origination Solution for Small Business Lenders

A lending process in India is not an easy task to execute. In reality, it is a complex ecosystem with various individuals, such as borrowers, lenders, and technology platforms involved in it. On the technology front, the main components are customer relationship management (CRM) software, mortgage point-of-sale (POS) software, and a mortgage loan origination system (LOS).

A loan origination system is a software platform that is designed to automate and optimize the loan application process and underwriting. A loan origination solution reduces manual tasks and boosts operational efficiency. Also, it helps financial institutions like banks, credit unions, and lenders to lower costs, ensure they’re following the rules, and make things a whole lot easier for borrowers.

A report by Allied Market Research forecasts the global loan origination solution industry to reach $12.2 billion, with a compound annual growth rate of 10.2% from 2023 to 2032. The report points out a few reasons for this growth, such as digital banking, the increasing use of AI, machine learning, and blockchain technology. Plus, there’s a big push to improve real-time customer experiences and new advancements in LOS technology.

To remain competitive in the lending industry, you need a modern LOS that benefits both the lender and the borrower. Below, we suggest some important criteria to help you select the best loan origination system suited for your needs.

Why Choose a Loan Origination Solution?

Lenders are realising that they need to put in some extra effort to gain an edge in the increasingly competitive digital lending market. Offering a frictionless loan origination software is one of the best ways to make an impression and increase customer engagement and onboarding.

Here’s how lenders can implement advanced loan origination solutions to streamline workflows and provide top-notch banking solutions.

1. Vetting and Pre-screening 

Vetting and pre-screening the loan application is the first step of the entire lending operation. The borrowers collect and assess the application to determine whether it meets the eligibility criteria or lending guidelines.

Loan applicants must present all the key documents, including tax returns, bank statements, credit history, employment details, and property details. This helps lenders to assess credit risk early in the process. Also, lenders can determine the borrower’s creditworthiness at this stage before moving to the underwriting stage.

This is where loan origination solutions come in handy since these are equipped to automate and digitize data collection and verification, accelerating the entire loan lifecycle.

Additionally, these loan origination solutions also eliminate the need for manual and cumbersome data entry activities. They can automatically capture and validate borrower data to help reduce long turnaround times.

This pre-qualification step enables lenders to invest resources in credible and authentic loan origination solutions. The loan origination solutions enhance both credit decisions and risk management capabilities within their core banking infrastructure.

2. Underwriting

The next phase after pre-screening is the underwriting stage, which is also regarded as one of the most crucial and resource-intensive parts of the loan origination process.

At this stage, lenders take every opportunity to familiarise themselves with the borrower and the different properties mentioned as collateral.

Lenders consider the borrower’s repayment history, credit scores, valuation of all properties, bank statements, and other regulatory compliance to verify the authenticity of all the details submitted by the applicant.

However, traditional assessment techniques are time-consuming and typically require multiple personnel with different degrees of expertise to handle complex loan applications.

A loan origination system can automate the underwriting process by flagging compliance issues and storing all the aforementioned documents in a central repository.

Further, these solutions deploy standardised risk assessment models, highlighting anomalies and other red flags.

3. Loan Approval and Finalizing Documentation

Once underwriting is done, the loan applications progress to the approval stage. Here, lenders prepare the critical documentation and confirm the terms and conditions of the loan.

All the essential loan details are finalized, including the total loan amount, interest rate, repayment cycle, and all the other terms and conditions.

However, approval is at the jurisdiction of various lending officers and stakeholders who eventually verify and sign off on the agreed terms. This can create confusion and frequent roadblocks, delaying the approval process and frustrating borrowers.

Considering the barriers mentioned above and the incessant need for quality control, it is crucial to use loan origination systems equipped with verification and compliance checks and offer a 360-degree view of the entire process.

These systems create detailed and accurate loan agreements that include the terms and conditions, eliminating the need to develop inaccurate contracts manually.

Additionally, digital loan origination platforms allow lenders to generate customised loan agreements according to their requirements, accelerating documentation.

4. Loan Disbursal

The last and final stage is loan disbursal. This involves last-minute sanitary checks, transfer of funds, and due diligence of all the documents submitted by the borrower. This step is imperative to ensure regulatory compliance and to determine whether all parties have completed their respective tasks as per the guidelines.

Some of the key activities during loan disbursal include initiating the fund disbursement procedures, document notarisation, documenting all the security instruments, and seamless transfer to loan servicing systems.

A loan origination system helps lenders avoid delays at this stage by validating all the security and compliance documents and automating fund transfer triggers. Lenders can minimise errors and reduce loan processing time at this stage by implementing a loan origination system while maintaining data integrity throughout the entire process.

Understanding Types of Loan Origination Solutions

Loan Origination solutions are categorized based on the types of loans that they support. Additionally, loan origination solutions can be either cloud-based, on-premises, or a hybrid of cloud and on-premises. In recent years, there has been a significant shift to more capable and easier-to-maintain cloud or hybrid platforms. The main types of LOS systems for both on-premises and cloud-based are:

Mortgage Loan Origination Solutions

Mortgage lenders that offer home loans to individuals for new home purchases or refinancing are competing in a challenging market due to consistently high mortgage rates. An efficient, user-friendly loan origination solution can help make lenders more competitive by streamlining the acquisition of new loans and simplifying the complexities of mortgage lending, including:  

• Compliance with regulations

  Mortgage lending is subject to various rules, and mortgage LOS systems help lenders comply with these requirements.

• Document management

  Mortgage loans involve a significant amount of paperwork, and these systems help manage and track all necessary documents.   

• Pricing and eligibility engines

  These tools help lenders determine the appropriate interest rates and loan terms for borrowers based on their financial profiles.   

• Secondary market considerations

  Mortgage LOS systems often include features to help lenders prepare loans for sale on the secondary market.

Consumer or Retail Loan Origination Solutions

Consumer loan origination solutions cater to various types of consumer loans, such as auto loans, personal loans, and student loans. These systems streamline the loan process, improve decision-making, and enhance borrower experience by including features such as:

• AI-driven Credit scoring and risk assessment

  These tools help lenders evaluate the creditworthiness of borrowers and determine the appropriate loan terms.

• Automated decisioning

  Consumer LOS systems can automate loan approvals for qualified borrowers, speeding up the process.

• Loan servicing

  Some consumer LOS systems include loan servicing capabilities to manage loan payments and customer communications.

Commercial Loan Origination Solutions

Commercial loan origination solutions are designed for businesses and organizations seeking loans for various purposes, such as expansion, equipment purchases, or working capital. Unlike consumer loans, commercial lending involves more complex financial analysis and relationship management. As a result, they often include features such as:

• Complex financial analysis

  Commercial LOS systems can handle complex financial statements and cash flow analysis to assess the creditworthiness of businesses.

• Relationship management

  These systems often include CRM capabilities to manage relationships with business clients.

• Syndication and participation

  Commercial LOS systems may support loan syndication and participation, where multiple lenders provide funding for a single loan.

Small Business Loan Origination Solutions

Small Business Loan Origination Systems are tailored for small and medium enterprises (SMEs), including merchant cash advances and microloans. These platforms differ from traditional commercial LOS solutions by offering:

• Automated Loan Processing: Supports applications for microloans, including required documentation and eligibility checks.
• Alternative Credit Data Integration: Leverages cash flow, revenue, and alternative financial data to assess small business creditworthiness, particularly for businesses with limited credit history.
• Faster Loan Approval and Disbursement: Many Small Business LOS platforms prioritize speed-to-funding, with some enabling near-instant loan approvals.
• Embedded Fintech Capabilities: Some small business LOS solutions integrate with accounting software, payment processors, and business banking platforms to streamline financial assessments.

In most cases, financial institutions will have separate LOS platforms for different lines of business. The complexity and varying areas of focus for each type of LOS system mean that one-size-fits-all solutions are rarely selected. In cases where a single LOS is used, it is typically a single platform that has been extended and configured for each line of business.

Selecting and Implementing a Loan Origination Solution

For financial institutions, the modernization and streamlining of the loan process cannot occur without implementing a Loan Origination System (LOS). Due to its important place in the lending ecosystem, a loan origination solution streamlines workflows for a wide range of financial organizations. This helps improve both efficiency and compliance while providing improved borrower experience at reduced manual workloads and operational costs.

Choosing the best loan origination platform involves consideration of functionality, scalability, integration capabilities, security, and user experience. Financial institutions should align their shortlisting strategies with their unique organizational requirements and long-term growth plans to ensure a seamless and future-proof implementation.

A lending institution can use a loan origination solution for mortgage originations, consumer lending, commercial lending, or small business lending. But its success is determined by selecting the correct platform, maintaining robust integrations, and executing best practices for implementation. By taking advantage of cloud-based and AI-centric innovation, lenders can achieve a competitive advantage in an increasingly digital, data-centric lending marketplace.

Book a demo and start your LOS journey today with us!

FAQs About Loan Origination Solutions

• What is the lending loan origination system?

  A loan origination system (LOS) is technology that helps financial institutions generate loan documentation in a way that complies with regulatory and internal requirements. Banks and credit unions usually install loan origination software on their local servers or access it through a cloud-based platform.

• What is the difference between a loan origination system and a loan management system?

  LOS (Loan Origination System) focuses on the initial stages of the loan lifecycle, including application processing and approval. At the same time, LMS (Loan Management System) deals with loan servicing and portfolio management after the loan has been originated.

• Is LOS a CRM?

  The two products serve separate but complementary functions within the mortgage sector. The CRM is used for relationship building, lead management, and the cultivation of clients along the loan lifecycle. The LOS, on the other hand, processes the loans, verifies compliance, and documents.

• What is loan origination software?

  A loan origination software is a software system designed to do the following: Manage loan origination and fulfillment processes, handle pricing and eligibility for each loan, and manage the required documents for underwriting and closing.

• What is the workflow of LOS?

  A loan origination system (LOS) streamlines the process of creating, managing, and finalizing loan applications. It encompasses the entire lifecycle of a loan, from initial application to final disbursement and beyond. Key stages include application intake, underwriting, approval, and closing, with automated workflows and data management capabilities.