A big part of my job is talking to private lenders. The number of conversations I’ve had is comfortably in the hundreds. My conversations span across lenders of every size and in every part of the country. With so many conversations under my belt, I’ve observed a certain theme.
I ask a lender what’s holding their business back. Sometimes they find it tough to put a finger on one thing and sometimes they throw a list of things at me. It is often a variation of: the technology stack is clunky, the market is soft, the cost of capital is too high.
So I ask a follow up question. If I handed you the fix tomorrow, how many more loans would you actually close next month? In the majority of cases, the confidence in their answer drops. The gap between the answer they give me instantly and the answer they arrive at when they actually test it is what this article is about.
A business is a chain of connected links
A physicist named Eliyahu Goldratt spent his career developing a philosophy about improving the performance of a business. Goldratt argued that a business is a chain of connected links, and a chain is exactly as strong as its weakest link. He called this the Theory of Constraints. Every hour, every dollar, every hire you put into a part of your business that isn’t the weakest link is an illusion of improvement. It feels like progress but nothing changes.
A private lending operation, like any other business, is a chain of connected links. Loan requests come in, you decide whether they fit your criteria before moving them into processing, underwriting, and closing. Then they get serviced, and eventually paid off. The capital goes back out to fund the next deal and the cycle repeats. Each function is part of the same, continuous chain.
What lenders blame, and why it’s almost never true
Ask a lender what’s holding them back and the answer typically has to do with the market, the cost of capital, or their technology stack.
These are all fair constraints. Rate cycles create volatility, high rates soften demand, and clunky systems impact productivity. But putting the blame on these things doesn't require anything uncomfortable from the person saying them.
Blaming the market or the cost of capital puts the onus on external forces out of any one person’s control. Blaming systems is maybe the most seductive excuse of all. Fixing the technology stack produces something you can point to as an improvement. Building a new system from scratch feels like progress.
But none of that is throughput. According to Goldratt, an hour saved at a part of your business that isn’t the constraint is a mirage. It doesn’t turn into one more loan. It just moves the idle time somewhere else in the chain where it’s less visible.
I’ve watched lenders spend real money, often six figures, building their own loan origination software because they were convinced that was the fix. A few months later, they have a system. What they don’t have is more loans, because the system was never what was standing in the way of their growth.
Why almost nobody wants to find the real bottleneck
The part that took me longer to understand, and the part I think actually matters most, is that finding the real constraint is uncomfortable. You can usually identify your bottleneck if you find where deals pile up and wait. The reason people don’t do this is because the honest answer is often personal.
Sometimes the problem is at the very front – not enough deals coming in to begin with. Sometimes, and I say this gently because I’ve seen it in leaders I deeply respect, the constraint is the business owner. Every deal routes through one person’s inbox, one person’s judgement, and that person is the ceiling on the entire company whether they want to admit it or not.
The same avoidance runs the opposite direction too. Some lenders are absolutely convinced that more volume is the answer to everything, when their margins are the actual problem. Goldratt drew a hard line between what he called Cost World and Throughput World thinking. Cost cutting has a floor. You run out of things to cut before you run out of problems. Growing throughput, in theory, doesn’t have a ceiling. But it doesn’t mean throughput is always the answer. A lender who’s already closing every qualified deal their capital and team can absorb, and still isn’t hitting their profit targets, does not have a volume problem. They have a cost structure or a margin problem. Originating more will just scale their problems.
So the question is: if you added more qualified deal flow tomorrow, would your profit meaningfully increase? If yes, you’re constrained on the origination side. Fix the deal flow before fixing the back office. If you’re already maxed out on what your capital and operation can handle and the profits still aren't there, your constraint is your cost structure. Adding more volume onto that machine just adds more strain to something that was already too expensive to run.
What to actually do about it
Goldratt left behind a method that lenders can apply to their business.
First, find the real constraint at every stage of your pipeline and not just the stage that happens to be annoying you this week.
Second, before you spend a dollar, get more out of what you already have there. If the constraint is sales, find out if your best closer is spending two hours a day on paperwork that can be automated or be handled by someone else. If it’s underwriting, see if your underwriter is using a disjointed workflow that you can simplify.
Third, make every other part of the business serve the constrained part instead of competing with it for attention. Faster closings don’t help you if you’re not getting enough deals into your pipeline in the first place. In that case, closing speed is a nice-to-have, not the priority.
Fourth, once you’ve squeezed everything you can, invest. Hire, buy, or build whatever it takes to ease the constraint. If the bottleneck can be solved through buying, then buy because it is often much cheaper than hiring or building.
And then do it again. Because the day you fix a constraint, a new one shows up somewhere else in the chain. And that’s okay. That’s not a failure of the method, that’s the method working since the goal is ongoing improvement.
The takeaway
This is not to tell you your constraint is sales, your technology stack, your cost structure, or the owner of the business. It can be any or all of them.
The most important take away is the honesty part. Most lenders can describe the problems in their business. But few have tested whether the problem they described is the one actually limiting their growth. The good news is that it costs almost nothing to identify the real problem. All it takes is an honest reflection and a willingness to accept an answer that makes you uncomfortable.
