Selecting and decide on a loan management software system is not an easy task and it is complex, however it can be manageable with careful planning and consideration. The complexity of selecting a system depends on the specific needs of your organization, each organization has specific lending policies, products and processes, and the size of your loan portfolio. In all cases it is important that the decision you make is a well-considered and a well-informed decision. Ending up with the wrong loan management software system gives frustration, slows down your growth and can even cause not being compliant with the regulator and tax authorities.
This article is written for microfinance institutions to help make the decision which loan management system to select easier. The article consists of two parts. The first part provides a practical step-by-step plan for selecting the right software. The second part covers which key factors to consider when choosing a loan management software system.
Please note this article does not offer any recommendation for a specific loan management software system. The final choice depends on your organization needs, which is specific and we are not aware of. This means that you have to put time in this making sure you select the right loan management software system that is suitable for your organization.
- Step Plan
To make the task more manageable, the following step plan can be followed:- Clearly define your needs
Start by thoroughly assessing your organization’s loan management requirements. Look at all policies. Based on that create a list of features and functionalities that are non-negotiable for your operations. - Budget Adequately
Ensure you have budgeted for both the initial implementation and ongoing costs of the software. Luckily there are many software as a service providers in the market that only require a monthly fee. - Research and Compare
Spend time researching different loan management systems and compare them based on all your criteria and budget. - Demo and Trial
Many software providers offer demos or trials. During the demo, actively participate and engage with the software. Ask the provider to walk you through common tasks such as loan origination, approval workflows, reporting, and document management. Pay attention to the user interface, ease of navigation, and the overall user experience. - Select the top 3 loan management software systems
Finalize your selection by choosing the top three systems that best meet your requirements. These will be the candidates for further negotiation and deeper analysis.After getting the demos, make a decision of the top 3 software systems based on your requirements. In this phase involve key stakeholders in the decision-making process. Gather input from team members who will be using the system regularly. Also do reference checks. - Finalize your Selection
By thoroughly assessing these aspects of a loan management system, you can make an informed decision that aligns with your organization’s loan policies and operational requirements.
- Clearly define your needs
- Aspects to take into consideration
We have highlighted some of the important aspects to look at when selecting a loan management software system. Below we highlight some of the important aspect where to look at when researching and comparing a loan management software system:- Customization and Policy Alignment
Most loan management software systems offer a certain degree of customization through their settings. This means you can set up the system yourself, which is needed because this allows you to configure it according to your specific loan policies and needs. Make sure the software can accommodate your unique loan policy requirements.
It can be that you find a loan management software system that you like but does not cater fully towards your loan policies, in this case you have two options: revise your loan policy to cater towards the system, as it is important your loan policies are up-to-date or find another system that fully caters towards your system.
Some of the important areas to look at in terms of customization are as follow:- Standardization of Loan Products
Do you offer standardized loan products with fixed interest rates and periods? If so, seek a system that provides pre-set loan templates, as this streamlines the loan creation process. You might offer loan products with fixed interest rates but with different periods, in this case it is useful to also have the option when creating a loan to change the loan period. - Management of Loan Approval Levels
Define the number of approval levels required for loan processing based on your company’s policies. Ensure the software can adapt to your maximum approval requirements. - User-Level Management
Assign specific user approval roles within the system. You can also create and assign different loan statuses to staff members, such as “loan officer” for processing, “administration” for open loans, and “accountant” for defaulted loans. - Loan Statuses
Examine the available loan statuses in the system. Typical statuses include Processing, Open, Default, Denied, and Not Taken Up. You might want to add your own statuses, make sure to check whether this is possible. - Registration and Loan Fees
Consider how the software handles registration fees and loan processing fees. Check if the system allows you to charge registration fees during customer onboarding or during loan creation and whether it can apply VAT on fees as your microfinance operation grows. - Loan Penalties
Find out whether the system supports loan penalty settings at the global level or during loan creation. For standardization purposes, it’s often preferable to set up loan penalties globally.
- Standardization of Loan Products
- Beyond customization
Other key aspects to look at beyond customizing the system are:- Accounting
If the loan management system includes an accounting module, ensure that it complies with relevant regulatory standards. An important area to look at is loan provision, the regulator has certain regulation requirements that need to be followed. Verify also that modifications to the accounting setup won’t impact previously recorded data and reports. For instance, adding VAT to application fees should not affect past transactions. - Document Management
Assess whether the system offers robust document management capabilities. This includes the ability to securely store and manage customer documents, loan agreements, collateral information, and other relevant paperwork. An efficient document management system can streamline compliance and enhance customer service. - Data Exchange and Integration
Usually loan management systems include various modules already such as CRM module, accounting module, document management and inventory module. You might still have preferences working with other systems that provide similar modules, for example the accounting module might be limited to your accounting needs. In this case you will need possibilities to easily exchange data between these systems. This can be done by two ways, either you look at a software system that has good data import and export functionality to manually exchange data or you find a system that has good APIs to automatically exchange data. Do note that when you use multiple systems, automation can be a time consuming task. - Reporting and Analytics
Evaluate the system’s reporting and analytics features. Evaluate for example the system’s ability to customize the dashboard to display metrics that are important to your organization, such as the number of loans in arrears. Also look for tools that allow you to generate comprehensive reports on loan performance, portfolio health, and financial trends. Check if these reports fit with the regulators quarterly report requirements, this saves you time. In case the system has an accounting module, make sure all the required and important accounting reports are supported. - Customer Support and Training
The availability and quality of customer support offered by the software provider is very important. Adequate training and support are crucial for your team’s effective use of the system. Ensure that the provider offers knowledge base resources and potential assistance in case of issues. - Security
Security is important when dealing with sensitive financial data. Verify that the system adheres to industry-standard security protocols and complies with data protection regulations. Look for features like user access controls, data encryption, and audit trails to safeguard your data. - Scalability and Future-Proofing
Think about your organization’s growth potential. Choose a system that can scale with your needs. Assess whether it can accommodate an increasing number of customers, loans, and transactions. Also check if there is any additional cost when scaling, a loan management software might be cheap when starting but might end up expensive your microfinance company is bigger. If you choose for an on premise version (installed at a local server), you will need to add more server capacity, in case you choose a cloud version this is not needed. A future-proofed system can save you from costly migrations as your business expands.
- Accounting
- Customization and Policy Alignment
In summary, while selecting a loan management software system can be complex, through careful planning and thorough research the process can be manageable. It’s an important decision that can significantly impact your operations, so investing time and effort in the selection process is very much worthwhile. It is also a decision you don’t want to make wrong, finding out a system is not suitable for you afterwards does cost usually a lot more money and time.
