Consumer lending is the largest financial industry in the world, and a loan business can be extremely profitable. Although you don't need a bank charter to jump on board and start lending money, you'll need the right plan, license and a solid marketing system to attract customers. It's possible to run into problems if you aren't proactive and meticulous in the beginning; however, the process of starting a loan company is largely straightforward
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Know your lending limits. Consumer lending companies are limited in how much they can lend. Generally speaking, consumer loans fall into the £325 to £32,500 range. Contact your state's regulatory agency that oversees loan company licensees. This is typically the same office that regulates banks, finance companies, mortgage lenders and title companies.
Create a business plan. Before paying a filing fee, completing an application package, incorporating and doling out legal fees, you must have a concrete business plan. Your plan should include a start-up and operating budget, market analysis, profit and loss projections and a systematic marketing approach to attract and keep a regular book of business. An experienced CPA can help you draft a strong business plan.
Incorporate. You may be required to form an LLC (Limited Liability Company) because some states will not license loan companies owned by sole proprietors. To form an LLC, you must complete a series of paperwork and decide upon a name different from your own. You must also pay a filing fee to your state government. In Illinois, for example, filing fees are paid to the State of Illinois Business Portal. Filing fees range from £97 to £650, depending on your state. Even if you are not required to incorporate, doing so will allow you keep your personal assets separate from your business assets (See Resources). Consult with an attorney to assist you.
Apply for a license. Most states will not allow you to operate a loan company without a license. An application package consists of 10 to 20 documents or more. These pages are fairly comprehensive. It is a common requirement to have a criminal background check and credit report pulled on each owner or manager of your firm. You may also be required to meet a net worth minimum ($25,000 to £65,000 is common), pay an application fee in the £195 to £650 range and be bonded anywhere from £16,250 to £65,000. You can have an application package sent to you or download one from your state's regulatory agency.
Get a location. Loan companies can operate virtually anywhere; however, you will be more successful setting up shop among other retail stores in areas of high traffic. Shopping malls and small, free-standing retail storefronts are ideal for consumer loan companies. An experienced commercial Realtor can help you find a suitable space.
Obtain money to lend. You'll need a credit line from a bank to lend money to your clients. Meet with an experienced commercial lender and have him or her examine your business plan. Your assets, credit worthiness and strength of your business plan will determine how much working cash you'll be given access to (See Resources).
Set your profitability goals and interest rates. Research other loan companies in your area to see what rates they charge to consumers. Be competitive, but don't give money away. Your profitability goals in your business plan and the rate you pay to your bank will help you set the interest rates you charge your clients.
Know the laws. Most states have predatory lending laws that prohibit lenders from charging extremely high rates and exorbitant fees. You must be careful in pricing your loans to ensure you don't violate these laws. You must also charge rates high enough to ensure you make a profit. An accountant can assist you in making decisions on profit margins if you are unfamiliar with how to do so.
Tips and warnings
- Don't jump in too deeply in the beginning. The loan business requires savvy sales skills and a considerable amount of lending knowledge. Network with others in the industry before you start adding different products and specialised loan programs.
- Properly outfit your office. Your office should be clean with ample space for your customers to sit and complete application paperwork.
- Develop a strong collection process. You will surely have loans that go into default. This means you will need a system that allows you to recover your losses when customers fail to repay their loans. This may include securing car titles as collateral or filing lawsuits in civil and small claims court.
- Consider making loans online. Online loan companies are often able to serve wider markets and customers that choose to shop without leaving their homes.
- Build a website, even if you do not offer online loans to customers outside of your area. A website where clients can complete applications will add credibility to your firm and create a steady flow of applicants.
- Make sure to have a fast Internet connection, especially if you are wiring money to online clients.
- Never violate predatory lending laws. Doing so can result in the loss of your license and serious criminal penalties.
- Never harass delinquent borrowers and always obey collection laws in your area. Failing to do so could result in civil lawsuits or criminal charges.
- Screen your applicants wisely. An excessive amount of delinquent loans could make it difficult for you to pay down your credit line, which will not sit well with your bank. Having a reserve account to draw from to pay on your credit line when revenue is light is wise.
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