Operating a loan company can be incredibly lucrative. According to the Pew Trust, 12 million Americans borrow from payday lenders each year, and spend a stunning $9 billion in loan fees annually. This carefully curated guide will elaborate on the eight most important steps for starting a lending business online, so you can carve out your own slice of this profitable industry.
8 Steps to Success
- Determine Your Business Model
- Understand State and Federal Loan Laws
- Write a Business Plan
- Find Investors or Borrow Funds
- Obtain Merchant Services
- Set Up Your Site
- Build Your Brand
- Have a Contingency Plan
Step 1: Determine Your Business Model
There are two particular business models that dominate the online loan industry – ones that focus on consumer lending, and those that specialize in commercial lending. The amounts, payment periods, and interest rates vary widely between the two.
Short-term loans are a prominent loan type for those operating a commercial lending enterprise. They generally:
- Include amounts from $1,000 and up
- Have terms of 3-18 months
- Are comprised of annual interest rates that range from 13% to 71%
Consumer online loans (which have been colloquially coined “payday loans”) are usually:
- Smaller, typically $500 or less
- Paid off in two to four weeks
- Given out with interest rates of up to 400%
Consumer loans appeal to many entrepreneurs, as they carry lower risk at lower dollar amounts. Plus, there’s more profit potential because they turn over faster and at higher interest rates.
However, business loans often have a lower default rate; meaning less inherent risk (but at a lower profit margin). It’s up to you to decide which is most suitable for your company.
Step 2: Understand State and Federal Loan Laws
As an online loans provider, you can facilitate customer transactions digitally with a few clicks of the mouse. Yet with this convenience comes governmental regulation, specifically in the form of laws that restrict how you offer your services (which vary state to state).
Here’s a quick look at some potential legal concerns for your online lending business:
- Some states allow online loans, but ban storefront payday loans
- Certain states cap interest rates
- A handful of states ban all types of payday lending
Those states that have made payday lending illegal (online or otherwise) include:
- New Jersey
- New York
- North Carolina
- West Virginia
- District of Columbia
Developing an affiliate relationship with a tribal lender might allow you to lend in locations where it’s otherwise banned. For an in-depth look at lending laws by state, consult this interactive map created by the Consumer Federation of America.
And be sure to keep an eye on the latest CFPB (Consumer Financial Protection Bureau) regulations targeting payday and vehicle title loans. These go into effect July 2019, and require lenders to:
- Determine whether borrowers can repay the debt they’re accruing
- Issue notices to borrowers on fees and collection activities
- Limit the attempts to collect payment via debit or ACH from borrowers who have overdrafted
- Restrict (and generally prohibit) the option to roll an expiring loan into a new loan
You must also know that no matter where the borrower resides, if they are a member of the Armed Forces, you cannot exceed a 36% annual interest rate under the Military Annual Percentage Rate (MAPR) regulations issued by the CFPB.
Step 3: Write a Business Plan
Once you’ve determined your type of online lending model and the laws within which you must operate, it’s time to write a comprehensive business plan. The components of the plan should include an:
- Executive Summary – This should read like an elevator pitch, and offer a glimpse of what you will do, opportunities in the market, your competitive advantage, and leadership qualifications.
- Detailed Business Description – Here is where you unfold all the information about your lending strategy, interest rates, and operational points of interest (which includes marketing plans and online branding).
- Market Research – Demonstrate your industry knowledge with statistics about online lending, how you’ll market your services, revenue potential, opportunities for growth, as well as anticipated challenges.
- Description of Your Team – This section should include bios of yourself and other key members (executives or otherwise), along with descriptions that reveal how your unique combination of talent makes your business a worthy risk for investors.
- Financial Data – You must include detailed reports and projections, profit and loss statements, anticipated revenues, costs of doing business, and cash flow statements for your first three years in business.
Step 4: Find Investors or Borrow Funds
With a business plan in place, it’s time for you to seek the money necessary to kickstart things. Unfortunately, if you’re looking for a Small Business Administration (SBA) loan, the outlook isn’t great. Such financing is intended for material goods (equipment, inventory, etc.) rather than less tangible purchases (like funds for a WordPress developer, or cash to begin operations).
Independent investors might be interested in funding your endeavor for equity or for interest (in the form of a loan). You can also consider tapping into your social network (friends, family, or a combination) to lend you the required capital.
Finally, many businesses go with a hybrid approach – using a mixture of commercial loans and money from private investors to get to a point where they can proceed.
Step 5: Obtain Merchant Services
Before you can truly launch your money lending business, you need to acquire fair and reliable merchant services. Since you’ll be collecting payments electronically, it’s pertinent that you have some form of card processing prepared (since cash is out of the question). Being able to accept both credit card and ACH payments is ideal for loan merchants.
Getting approved for a merchant account in this industry can be a challenge, since all lenders are classified as “high risk” by banks. Thankfully, certain providers specialize in high-risk merchant services and are used to helping businesses deemed risky.
Step 6: Set Up Your Site
You’ll also need a web developer to build your site. You can hire one directly, or work with a partner recommended by your domain hosting service. Someone who specializes in WordPress is a great option, since WP is so friendly to use for people who aren’t too technically skilled (so once it’s set up, you can operate it on your own).
You should also ensure your web developer understands the importance of making your website GDPR compliant, and to block foreign ISP addresses if necessary. Lending to international clients is far more complex, and might not be an arena to explore until you’re more experienced in lending and finance.
Finally, you’ll need advanced encryption and security services to protect the financial information of your borrowers. Thankfully, most merchant service providers offer such technology to their clients.
Step 7: Build Your Brand
There are many competitors out there in the world of online lending – so while you’re setting up your business, remember to simultaneously be developing your unique brand so you can differentiate yourself. Certain approaches to consider include:
- Expanding your reach with targeted marketing, to consumers in specific states or regions
- Develop marketing campaigns that target consumers’ financial needs and goals
- Offer free resources (blogs/whitepapers) on using loans wisely, plus tips for repayment and how to avoid debt traps
In your marketing materials, discuss how short-term borrowing can be leveraged to avoid financial ruin. Also elaborate about the most common reasons consumers seek quick-and-easy online loans, such as:
- Avoiding utility cutoff
- Stopping auto repossession
- Unexpected bills
- Emergency auto repairs
While developing your brand, you should acknowledge that although short-term loans get a bad rap, they still fulfill a crucial need for many consumers. Some people simply need a minor infusion of cash to keep the lights on until their next paycheck. Be honest when marketing yourself, and your consumers will trust you (something that money can’t buy).
Step 8: Have a Contingency Plan
Once you begin extending loans to consumers, it’s time to grow. From this point, you should continue to evolve your strategy as you build further knowledge and experience.
Given shifting legislative and regulatory concerns, developing a contingency plan is wise. For instance, if more states begin to prohibit online payday loans, you might want to branch into commercial or title lending. Being adaptable is critical in a high risk industry, so be prepared to change your business model down the road if necessary.
Compared to running a brick-and-mortar lending establishment, online lenders enjoy a much higher profit margin than their storefront counterparts. Starting one today is simply a solid business opportunity – one with few barriers to entry (not to mention an impressive revenue potential).
Your borrowers will be sending money your way via credit card, debit card, and ACH transfer. To ensure you can recoup loan principal and interest, you need top-tier high risk merchant services. Handle all of these payment methods and more with Motile’s best-in-industry payment processing solutions.