The Ultimate Guide on How to Start a Loan Business

Ever wonder how to start a loan business? The loaning business can be extremely lucrative. Check out everything you need to know to start a lending business.

Did you know that 12 million people take payday loans every year? The fees from these loans bring 9 billion dollars into the financing industry. The most impressive thing about it is that payday loans are only one of the many lending products offered by financing institutions.

The financing industry is very lucrative but, only if you get into it the right way. Have you considered starting your own financing company? If not, there isn't any better day than today.

Don't have a clue about how to start a loan business? We have you covered. We'll tell you all you need to know to get started and what steps you must take to make it happen.

Read on to learn more.

How to Start a Loan Business: Your Step by Step Guide

Starting any business is challenging but, only if you don't have the right plan. A financing business is no exception to this rule. You may be asking yourself how can you start a finance company if you don't have a background in financing.

Yes, it's preferred to possess working knowledge about the financial industry. But, don't sell yourself short. If you develop the right plan and consult the best advisors, you can make it happen.

Here are the steps you should follow to start a finance company in no time.

1. Research, Research, and More Research

Before you can start your business, you must know what you are getting into. It's important to learn about the financing industry and your options. What type of lending services can you provide?

What are the regulatory requirements in your state? An example is how in the state of Texas you are required to register a location while this requirement may not apply in other states. How much will it cost you to start your loan business?

What are your market needs? These are some of the questions that can guide your research. Based on what you learn, you must write a business plan.

Many people try to skip this step but, your business success depends on great planning. Remember to tailor your business plan for your market and company vision.

2. Decide How You Are Going to Fund the Loans

To provide loans, you need the funds to extend financing to the borrowers. Are you going to fund them yourself? Some loan business owners decide to take money from their retirement accounts or other savings to start their businesses.

It isn't recommended to fund the loans yourself because you assume too much risk. Remember that some customers may not repay their loans even if you have the best underwriting process in place. If this happens, you may lose a large percentage of your investment.

Another option, you may consider is working with investors. If you decide to seek funding from investors, it's recommended you consult an attorney. Also, you may need to register with the Securities and Exchange Commission (SEC).

3. Register Your Business

Before you start giving out loans, you must register your business. The right company structure will depend on the type of business you will conduct. Many financing businesses register as Limited Liability or Incorporated Companies.

Both corporate structures provide liability protection. Yet, they aren't interchangeable. It's recommended you consult a legal expert for more information on what business structure is better for your company.

4. Obtain All Applicable State and Federal Licensing

Through your research, you learned about the applicable state and federal licensing requirements. If you decide to offer commercial financing, state and federal regulations may not require the same licensing as a payday loan business.

In most states, the latter only requires state licensing as a credit access institution. Before launching your business, you must obtain all the applicable licenses to comply with state and federal regulations. If you don't, you are exposing yourself to hefty fines and penalties.

5. Develop Your Underwriting Criteria and Lending Process

A successful financing business is as good as their underwriting criteria. You can't lend money to everyone that comes through your door. Who is your ideal customer?

What is their financial profile? If you decide to open a payday loan business, you may offer no credit loans to your customers. This type of loan doesn't require you pull your customer's credit.

For these loans, it's essential to have in place the right underwriting process. Your process must screen the customer by asking the right questions to determine their ability to repay. In contrast, when you offer business financing your underwriting criteria will be more thorough.

For small business financing, you may offer bigger loans with more strict requirements. An example is requiring collateral on an equipment loan and pulling the customer's credit to learn about their ability to repay.

After deciding on your underwriting process, it's important to establish your lending process. It should cover from the time your customer gets through your door till they sign the loan. It's recommended to consult an attorney to make sure your process complies with all regulations.

6. Prepare Your Business for Launching

When you start a lending business, it's important to choose a great location and hire the right people. Before launching your business, you must prepare your location and your team. Develop internal pieces of training to keep all your staff on the same page.

Also, you should establish a compliance department to oversee all your operations. This division will be your check and balances system to comply with all applicable regulations. Develop your marketing plan to get your name out there.

Advertising your lending business is essential to compete in the industry. Make sure all your marketing campaigns comply with all the applicable rules and regulations. Some of the laws you should keep in mind are the Fair Credit Reporting Act, the Equal Credit Opportunity Act, and the Truth in Lending Act.

7. Start Lending

After preparing your business, you can start lending and helping customers make their dreams come true. You should always aim to provide the best financing and customer service to your customers.

Bottom Line

You might've asked yourself too many times how to start a loan business. But, always thought opening a financing business was unattainable. Now you know that the key to establishing a successful financing company is developing and executing the right plan.

Start with the basics and work toward your business launch. We're confident that if you follow our guide and consult the right experts, you will launch your loan business in no time.

Want to learn more about the financing business? Check out our Finance section for more interesting articles.