In today’s credit landscape, many consumers struggle to obtain financing due to limited or less-than-ideal credit histories. The Consumer Financial Protection Bureau (CFPB) reports that more than 26 million Americans have a thin or nonexistent credit file, which can make approval difficult through a single, traditional lender.
Waterfall lending seeks to address this challenge. Rather than submitting multiple applications to different lenders, borrowers can complete one application that is subsequently reviewed by multiple financial institutions in a defined sequence. This approach expands the likelihood of approval and offers a more comprehensive range of financing terms to suit diverse borrower profiles.
This article will examine the fundamentals of waterfall lending, its operational benefits, and how platforms like FinMkt facilitate a seamless, multi-lender approval process.
Waterfall lending, sometimes called waterfall finance, refers to a financing structure whereby a single credit application is passed through multiple lenders in a specific order of priority. In the context of lending, once the first lender (often a prime lender) denies an application, it is promptly forwarded to a second lender (usually near-prime), then potentially to a third (subprime), and so forth.
The primary purpose is to provide applicants with multiple lending options and to mitigate the possibility of outright rejection due to a single lender’s underwriting criteria.
In a conventional financing setup, a borrower’s application is assessed by one lender. If the applicant’s credit score, debt-to-income ratio, or financial history fall outside that lender’s specifications, the outcome is a denial. The applicant is then left with the cumbersome task of searching for alternative lenders, which can lead to additional hard credit inquiries and time lost.
A 2021 Federal Reserve study highlights that approximately 21% of loan applicants are either declined or do not receive the full amount they requested. This figure becomes more pronounced among those with lower credit scores or limited credit histories. Such denials not only disadvantage consumers but also limit businesses’ opportunities to finalize sales or expand their customer base.
Below is a comparison table contrasting traditional financing with waterfall lending:
From the table, it is clear that waterfall lending benefits both borrowers and merchants by increasing the probability of financing approval and reducing the administrative burden typically associated with multiple loan applications.
Credit scores are central to waterfall lending. Lenders often categorize borrowers into prime, near-prime, and subprime credit tiers. Each lender within the waterfall structure has unique underwriting guidelines, which generally align with one of these credit score categories.
Not every application will traverse all three steps; some are approved early in the process. Nevertheless, the multi-tiered system ensures a wider pool of applicants can secure funding.
Waterfall lending is widely used across many industries to expand potential customer bases and enhance approval rates:
The global BNPL market influenced by similar multi-lender models, is expected to reach $25.5 billion by 2028, growing annually at approximately 26% from 2022 to 2028. This trend highlights the increasing demand for flexible, multi-tier financing methods.
To illustrate how waterfall lending functions in real scenarios:
These cases illustrate how the waterfall model benefits both parties by widening the range of potential approvals.
FinMkt is a leading SaaS provider offering a unified multi-lender platform. Through FinMkt, businesses can implement waterfall lending without the complexity of maintaining direct relationships with various lenders.
For instance, if a merchant sees an average customer credit score of around 650, the “first look” can be directed to a near-prime lender that specializes in servicing scores within that range. If the initial attempt is unsuccessful, the application cascades to a subprime option. This targeted approach makes the financing process more efficient.
Implementing waterfall financing through FinMkt not only increases the likelihood of approvals, but also encourages repeat business and referrals. When customers know that a merchant can offer a range of financing options—even for those with lower credit scores—brand loyalty and positive reviews are likely to follow.
Q1: Does Waterfall Lending Affect My Credit Score More Than Traditional Lending?
In most cases, no. Many waterfall lending solutions (including FinMkt) begin with a soft credit inquiry, which does not impact an applicant’s credit score. A hard inquiry typically occurs once the applicant proceeds with a specific lender’s offer. However, practices vary by lender, so it is advisable to confirm whether an inquiry will be soft or hard.
Q2: Can Small Businesses Benefit from Waterfall Lending?
Yes. Small and medium-sized businesses can benefit significantly by partnering with a multi-lender platform. They can reach a broader customer base and do not need to manage relationships with multiple lenders on their own.
Q3: Is Waterfall Lending the Same as Stacked Financing?
No. Stacked financing usually involves taking multiple loans simultaneously. Waterfall lending uses one application and routes it sequentially to different lenders until an approval is found.
Q4: What About Interest Rates?
Each lender in the waterfall has its own underwriting standards and interest rates. Generally, prime lenders offer the most favorable rates, while near-prime and subprime rates increase in accordance with the perceived risk.
Q5: Do Businesses Have to Remain Tied to Specific Lenders?
Not necessarily. Platforms such as FinMkt allow merchants to modify their lender network based on performance or changing market conditions. This flexibility provides an opportunity to optimize the waterfall as a business evolves.
Q6: How Long Is the Approval Process?
Most waterfall platforms are automated and provide near-instant decisions. While further documentation might be required in some cases, this approach generally offers faster turnaround times compared to traditional financing methods.
Investopedia: “Waterfall Payment”
https://www.investopedia.com/terms/w/waterfallpayment.asp
Consumer Financial Protection Bureau (CFPB): Credit Invisibles
https://www.consumerfinance.gov/about-us/blog/five-year-retrospective-cfpbs-work-improve-consumer-credit-reporting/
Federal Reserve: Credit Application Success Rates
https://www.federalreserve.gov/consumerscommunities/shed.htm
In an environment where consumer credit needs are increasingly varied, waterfall lending provides a more inclusive, efficient approach to financing. Through platforms like FinMkt, businesses can integrate multiple lenders under one system, helping a broader range of customers secure funding while driving sales and retention.
Disclaimer: The information in this article is intended for general reference only. Always consult financial professionals or legal counsel before implementing new financing strategies. Terms, rates, and credit criteria may vary by lender and jurisdiction.
