Collateral management is critical to secured lending, as it involves tracking the values and conditions of collateral assets over the life of the loan. However, in the modern age, where more variable assets like cryptocurrency, art, and private securities are being used as collateral, collateral management tools need to keep up with rising and falling values.
Traditional collateral management methods used manual, paper-based documentation and processes, which isn’t compatible with the new type of secured lending we’re seeing today. Emerging types of secured loans are dynamic in nature, shifting with collateral values and market conditions. Asset tracking tools must work in sync with loan management systems to adjust loan terms and credit limits as values and conditions change.
Below, we’ll discuss how digital collateral monitoring tools can solve the challenges of modern secured lending by giving lenders the ability to:
- Track and manage collateral digitally
- Automate collateral monitoring
- Provide real-time insights into collateral values and risks
- Enhance data accuracy in conjunction with shifting values and market conditions
Moving from manual collateral monitoring to digital
Many lenders still rely on paper files to track collateral for secured loans. While this has been the standard for decades (or even centuries), digital solutions have changed how modern lenders can track and monitor collateral.
Benefits include:
- Real-time visibility: Up-to-date access to collateral data like inventory levels and asset location allows for early problem detection and risk mitigation, creating an ‘always aware’ style of monitoring that traditional methods cannot match.
- Increased accuracy: Paper-based monitoring is prone to manual errors or even loss of files over the years. Switching to digital reduces errors from manual input, reducing lender risk.
- Better efficiency: Fintech solutions dramatically streamline workflows and tasks compared to manual processes. Lenders can reduce operational costs while focusing their time on higher-value activities and relationships.
- Enhanced security: Digital encryption, access controls, and audit trails secure sensitive collateral data, protecting lenders and borrowers from data breaches and unauthorized access.
3 key features of modern digital collateral monitoring
While the first step is switching from paper to digital, lenders can benefit from knowing what sets a collateral management solution apart. It’s one thing to put the information from your paper collateral management system into a spreadsheet—or go from a spreadsheet to a basic program. It’s another to switch to an advanced solution with the dynamic tracking abilities modern secured lending requires.
For lenders looking to give themselves the ability to create innovative secured lending solutions, these three features are key:
01
Automated valuation
Secured lending based on variable assets requires an automated way to track asset values; it simply cannot be done manually. A modern solution will integrate with external data sources, such as market databases and appraisal services, to give up-to-date valuations. This is similar to the way real-estate tools such as Zillow and Redfin give home value estimates but for collateral assets instead.
Solutions may also use algorithms or predictive models to estimate collateral value based on various factors. Automated, up-to-date valuation enables lenders to easily shift loan terms and credit limits based on the real-time value of variable assets like crypto, art, and inventory.
02
Alerting and reporting
Modern loans based on variable assets can create more risks than traditional loans based on fixed assets, but those can be mitigated with digital collateral monitoring. Digital tools have robust alerting and reporting capabilities. Alerts can automatically trigger during events such as LTV breaches, changes in collateral value greater than a certain percentage, or approaching expiration dates.
Additionally, customizable reporting tools can give lenders insights into collateral health, market trends, and their portfolio’s overall performance. Lenders can use reports to evaluate metrics like collateral concentration (i.e., how much of your portfolio is tied to a certain type of collateral), valuation changes, and risk exposure.
03
Integration with loan management systems (LMS)
Collateral monitoring isn’t useful if it’s not tied to the loan, which makes seamless integration with the LMS crucial. By feeding the real-time collateral asset data into the LMS, lenders can centralize data management under one system for both loan servicing and collateral management. This makes it much easier to update loan terms and credit limits, as both collateral and servicing data are up-to-date and used in conjunction to create the best terms.
These three key features empower lenders to make informed decisions, manage risks effectively, and streamline secured lending operations. They also enable the innovative types of loans that small-to-medium businesses are looking for and that their competitors cannot match.
Unifying your loan tape with collateral
Canopy is a core lending system where loan and collateral data are managed in a single platform rather than separately. That means you don’t need to integrate separate systems for servicing and collateral management but instead manage them in one. Unifying collateral and servicing under one system allows for a streamlined and efficient approach to managing secured loans.
Canopy helps you handle the complexities of modern, variable-value collateralized assets by:
- Tracking asset valuation in real-time.
- Monitoring loan-to-value (LTV) ratios.
- Mitigating risk by providing alerts and notifications on LTV breaches or changes in collateral value.
Canopy’s unified approach enables new types of secured lending products to be created (like crypto or art-based loans), simplifies secured loan management, streamlines data sharing, reduces risk, and improves efficiency.
Digital tools improve collateral management for lenders of all types
Fintechs, embedded lenders, and smaller financial institutions like credit unions and community banks can all reap substantial rewards from digital collateral monitoring tools. They can create innovative and new loan products, increase operational efficiency, reduce risk, and give themselves a competitive advantage over non-adopters in the secured lending space.
The time to explore and adopt digital collateral management tools is now. By embracing these innovative solutions, lenders can position themselves at the forefront of modern secured lending.
