How to set up a private lending business

Written by maggie gebremichael
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Traditional banks or financial institutions are not the only source of lending. Private lenders provide financing to various businesses. You can establish a small business that lends capital to start-ups or a corporation that targets companies with more than £325,000 in annual gross revenue. As a private lender you will probably not become very involved with management decisions.

Skill level:
Moderate

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Instructions

  1. 1

    Develop a business plan that describes your company's strategies, guidelines and short- and long-term goals. Indicate if you plan to focus on a particular type of company, such as energy or technology start-ups. Quantify expected revenue, such as loan interest and fees, along with expected expenses, such as those related to employees, overhead and write-offs. Describe how you will evaluate risk, by conducting extensive credit and criminal background checks for all applicants.

  2. 2

    Secure capital. You will not be able to get a loan from a bank so that you can loan money to other companies. Sources of capital vary--they may include friends, family members and colleagues. Cultivate investors from among wealthy individuals or venture capital businesses to create a pool of money. You need a relatively liquid source of funding, so avoid storing money, such as in long-term certificates of deposits.

  3. 3

    Advertise your business. Place ads in a local business journal or chamber of commerce. However, such advertising can cause you to be inundated with inquiries or loan requests. If you have a limited advertising budget, rely on word-of-mouth awareness, and limit public outreach. By hosting a student or community entrepreneur grant competition, you will receive multiple proposals while building recognition about your company. Join professional organisations like the National Business Incubation Association.

  4. 4

    Analyse loan applicants carefully. Assess years in business, credit scores and assets. If five people apply as partners for a single loan, check each applicant's background. Determine whether any applicant has defaulted on a loan. Review projected sales and costs as well as supporting evidence. For example, a person might approach you for a loan and claim that the company costs are under £6/product. Request evidence that demonstrates total cost. Evaluate whether a market exists for the product or service and assess any competitiors.

  5. 5

    Prepare and record a legal contract with each approved loan application. Although some oral contracts are binding, create a written agreement that reflects the lending terms. Consult with a certified accountant and a licensed attorney to address your company's financial and legal exposure through taxes and other liabilities.

Tips and warnings

  • Private lenders invest in different ways. Make sure to identify your target audience (small businesses, start-ups, student loans) to avoid overextending yourself.
  • Private lenders make money by charging high interest rates on risky loans. By demanding equity or ownership in start-up companies, you can impact business decisions such as votes about expansion plans or additional debt.

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