Almost everyone will find themselves in need of a loan at some point in life.
Whether that’s because of a traditional mortgage, starting a new business, or an emergency situation.
Which is why there will always be a need for finance businesses and micro lending institutions.
If you’ve ever considered starting a lending company, this business model is a great option for those who can handle some risk, and want to start a business from home or online.
My name is Ippei, and I’ve personally been starting successful online businesses since 2014...
And I’m passionate about helping others to generate passive income online for themselves too.
So I’m going to break down the seven steps you need to get started in this business…
As well as the main pros and cons, and the realistic startup costs for a finance business.
Let’s do this.
How to Start a Finance Company in 2021
Considering Starting a Finance Company in 2021? Here's What You Can Expect:
Micro lending companies and finance businesses will always be in high demand because people will always need money. To start your own successful finance business, you will first need to write a business plan, recruit your team, qualify your clients, and develop risk management strategies.
Start Up Costs
While this list is not a comprehensive compilation of everything you need to start a finance business, it provides a snapshot of what you need to add into your business plan.
Profit Margins of Established Finance Business
According to Investopedia, the average Profit margin of this kind of business is: 14.71%
7 Step Quick-Start Checklist:
1. Set Yourself Up For Success
Money.
You won’t get far in this life without it.
Which is exactly why finance businesses and micro lending institutions are so important.
Even the best people may find themselves in a bad situation and in need of money.
And many small business owners had to take out a loan to get their business up and running!
If you are considering starting your own finance company or micro lending business, you will be able to meet the needs of everyday people and budding entrepreneurs.
But with this industry comes an inevitable amount of risk.
Which is why you need to set yourself up for success from the beginning by writing a business plan and getting your lending institution structured legally.
Your business plan will be essential for minimizing the risks involved in starting a finance business.
If you have a well thought out plan in place, you will be less likely to make preventable errors in the management of your new business.
Which means that your business plan needs to be created with clear, actionable steps that will move you forwards towards your long term goals.
If the thought of writing a business plan from scratch is a little intimidating, you can use the following outline for guidance:
Basic Things to Include in a Business Plan:
Once you have gotten your business plan down on paper (or more likely… saved to the Cloud)...
You can form a legal business entity structure for your finance business.
The most practical option for your business will be to start out by forming an LLC.
An LLC stands for Limited Liability Corporation, and as suggested in the name…
Your LLC will protect you from being personally liable as the owner of your business should a future client decide to sue you.
Another thing to note when you are pursuing how to start a finance business, is that you will need to research the required licensing.
Although the licensing requirements for a finance business will vary from state to state, it is always helpful to obtain a finance license if possible.
Check with your local state authorities to determine what they will require of you regarding any licenses and certifications for your micro lending business.
From there, you will need to apply for your EIN number online with the IRS.
This step is free, and easy to accomplish!
Plus, you will need your EIN number to file your taxes at the end of the year, as well as for opening a business bank account and applying for a business credit card.
2. Build Your Team
Whether you are starting your finance company with well over $50,000, or you’re working with less than $10,000…
There is one thing that will hold true:
You need a team.
Starting a micro lending business is hard work, and handling people’s money isn’t something to take lightly.
Before you offer up a single loan to your first client…
You should have a well established team in place.
Who should you be including on this team?
What you need:
Although many people equate bookkeepers and accountants to be the same thing…
They aren’t.
And ultimately, you are going to need the assistance of both.
A bookkeeper will be responsible for helping you to manage a general ledger, as well as assisting with the general organization of the financial affairs of your business on a month to month basis.
Whereas an accountant is responsible for inspecting and analyzing your business at the end of the year, and for filing your business taxes.
While both of these roles are vital for a healthy business…
At a bare minimum, you will need to implement a DIY bookkeeping software, and hire an accountant to assist with the filing of your taxes.
As your business grows, you will be able to bring on a professional bookkeeper more consistently.
Your lawyer and compliance officer will be the next team members that you will need to select for your business.
While your bookkeeper and your accountant are invaluable…
Your lawyer and compliance officer will be absolutely vital.
Why?
Because these are the people that will ensure that everything you are doing in your micro lending process is legal and above board.
Plus, your lawyer will be responsible for helping you draft client contracts, and ensuring that risks for both parties are minimized as much as possible.
Your lawyer will also be instrumental in the case of dealing with a client who defaults on a loan, or simply refuses to pay.
When selecting the right lawyer and compliance officer for your business, make sure that they each have experience with working alongside a micro lending company.
Expertise in your niche is not just a plus…
It’s a must.
3. Making Money as a Lending Business
So at this point, you might be wondering how exactly lending businesses even make money…
Let’s unpack this so that you will have a clear understanding of the inner workings of this business model.
Primarily, micro lending businesses make their money through interest, and also through items that are put up as collateral if your client defaults on the loan.
The laws for collecting the money owed to your business will vary based on your state, as will the legal interest rates.
Unfortunately…
You can’t just charge the interest rate that you feel is reasonable.
Or an interest rate that is simply set to price gouge people.
(This would backfire anyways, because your interest rates wouldn’t be competitive… And the only people willing to take on a loan with an outrageous interest rate probably have no intentions of paying you back in the first place.)
To find out the legal interest rates for niche loans in your area, search in Google “What is the legal interest rate for lending money in my state.”
Another great way to set your interest rates will be to do some research on the average credit card interest rates for individuals with poor credit in your area.
Then charge slightly less than this percentage, so that your lending rates will be competitive.
Which will easily persuade clients to go with your lending services rather than their current, trusted credit card company.
I also highly recommend staying local with your lending to start out.
This way you can learn the local regulations and get comfortable with your lending plan.
Plus, staying local will help you avoid a situation in which your client has defaulted on their loan…
But they live across the country, and now you have to figure out a way to track them down.
Another way that finance companies make money off of their clients is through charging fees.
Fees You Could Charge:
Late fees are really the only thing necessary!
The other fees will just frustrate your client…
But the late fee will motivate them to pay you back in a timely manner.
Which encourages your cash flow to remain healthy.
4. Choose a Target Audience
As with almost any business model…
You will need to know the target audience and “ideal client” for your lending business.
Smaller lending companies will need to find the right niche, rather than marketing your services to anyone and everyone.
So what type of client will you be lending to?
If you are primarily looking to give out micro loans less than $10,000…
Then your client will most likely be an average middle to lower income client that is just looking for a little help.
The next tier of clients would be those who are looking to make a sizable business investment.
For Example:
Someone who is looking to break into the house flipping market, but they need $100,000 to get started to purchase property.
Your smaller loans will also be commonly sought out by people who are in an emergency situation, and they need payday loan or payday advance.
Oftentimes, people get stuck in an unexpected emergency situation, such as a car repair or a water leak.
These loans will be great for starting out, because they are short term loans.
Most of the time, once people have another paycheck, they will be able to pay back the $500.
And if you are just beginning as a finance company, you might not want to launch yourself into large long term loans where you won’t see a return on your loan for over a year.
As a small business, getting steady cash flow coming in early on will be very important.
So these smaller loans will help you get cash flow coming in and out quickly…
Even if they aren’t the biggest ticket returns!
Once you are more well established, you will be able to pursue larger loans with more long term clients if you so choose.
5. Qualifying Clients
I absolutely cannot stress this point enough...
Always check a client’s credit before agreeing upon a loan!
And don’t just rely on them to pull their credit score…
The unfortunate reality is that because of programs like photoshop, almost anyone can falsify a credit report before submitting it to you.
Just because it looks authentic…
Doesn’t mean that it actually is!
My advice is to ALWAYS verify their credit score yourself by pulling their credit report yourself.
The next step to qualifying your clients will be to set your client criteria.
Who will you accept for your loans?
What qualifications does your client have to meet to obtain a loan from you?
Some things to consider regarding your client criteria are:
This last item is extremely important, because the item or items that they put up as collateral will be the difference between a secured loan and an unsecured loan.
Secured Loans VS Unsecured Loans:
An unsecured loan is when the only result of a default or failure to pay the money back is that you will sue them.
Which can be completely useless if they have nothing of value to give you in the first place…
These types of loans are extremely high risk, and I don’t encourage anyone to start out this way.
Once your business is a more secure place, you can consider making a riskier investment if you want to.
And yes, I say an investment because your clients are your investment.
You are investing in their ability and integrity to pay back the money that they have borrowed including interest.
So when you are evaluating who you will and won’t lend to…
View these people as you would any good or bad business investment.
Which means that no matter how nice they are, or how deserving they are…
If they aren’t a good investment, then they aren’t a good investment.
While this doesn’t mean that you can never lend to someone based on goodwill and charity…
Just remember that if you only give out your money to charity case situations, you’ll eventually become one yourself!
On the flip side of this, there will always be a need for institutions like the fabled “Bailey’s Billing and Loans.”
You just need to carefully and wisely decide when the time and place for your “It’s a Wonderful Life” moments will be.
The other thing to note is that most people who are seeking financing for one reason or another are doing so because they do not have extensive resources.
Including resources for collateral.
So if you are determined to only lend in the situation of a secured loan…
It will highly limit your viable market of clients.
This is simply the nature of the finance and lending game.
Lastly, never hand out a loan without first having a signed contract!
When developing your client contracts, you will need to work closely with your lawyer, and include things like:
6. Marketing
Here’s the good news…
Marketing for your finance business won’t be much different than marketing for any other kind of business!
The bad news is that if you have a poor marketing strategy, and you can’t consistently generate new clients…
Your lending business will be toast.
But I’ve got more good news for you…
If you are looking for an effective strategy for generating leads for your micro lending company, I can help.
In fact, local lead generation is the business model that currently generates over 50K in passive income for me on a monthly basis!
So if you want to trusted marketing strategy for generating business leads with ease, you can get more information on the online course that I’ve developed here.
But in addition to honing your own lead generation strategy…
You will also need to tackle some marketing basics.
Like building a website for your finance business.
Building a website doesn’t have to be scary!
While your site will need to be both functional, user friendly, and professional…
There are actually some amazing template based website builders out there that will help you tackle building your own website with ease.
Some of my personal favorites are:
From there, I highly recommend that you set up a Google My Business page.
Especially if you are hoping to attract local leads.
Your GMB page will not only help people find you more easily within Google…
But it will also add credibility to your business, and help your website rank well within Google’s search engine.
What’s even better is that a GMB page is completely free to set up.
Once you apply for your GMB listing, you will receive a postcard in the mail with a confirmation code…
And you’ll be good to go!
If you are interested in offering small loans to business startups…
You can also look into joining your local chamber of commerce!
Networking with new and established business owners in your community can be a great resource for connecting with potential clients.
7. Risk Management (When People Don’t Pay)
As I mentioned at the very beginning of this article…
When you are in the business of lending people money, whether small large:
Risk is inevitable.
To put this bluntly…
Sometimes, people just don’t pay.
And you will be responsible for ensuring that your business is prepared to handle these frustrating situations.
Which is exactly why you will need to have risk management strategies in place from day one of running your own finance business.
So what does risk management look like for a micro lending business?
Well for starters…
This is why you have a lawyer on your team from day one!
Your lawyer will be able to assist you in obtaining a court order saying that your client hasn’t paid back their loan amount.
In this instance, your lawyer will actually be able to garnish your client’s wages by going into your client's bank account and drawing money from his paycheck before he even gets paid.
And yes, this is completely legal!
The other option is to send the bill to collections…
Which will ruin their credit score.
Most people don’t want this, so confronting your client with the reality of sending their bill to collections might be enough to provoke them into coughing up the cash.
Regardless, when you are agreeing upon the asset or assets that will be put up for collateral…
Make sure that the assets are insured!
For Example:
If you lend someone $1,000 they may put their brand new iPhone up for collateral. Which is great! But what if they default on their loan, and you go to collect their phone… Only to discover that it is cracked or broken? Well, if they have insurance on their phone, then you will be able to easily get the phone repaired or replaced. Problem solved.
If however, you failed to confirm that they have the appropriate insurance for their collateral item…
Then you’d basically be screwed.
Two clauses to discuss with your lawyer are:
Although these clauses are not applicable in every situation, they can be written into applicable contracts and end up saving you both money…
And a massive headache.
Good Guy Guarantee:
Promissory Note:
Pros and Cons
of starting a finance company
Pros
For many aspiring entrepreneurs, one of the greatest draws to launching a business is the freedom to set your own schedule. There’s no boss to dictate your day, or look over your shoulder… You are in control of your time. This can be both freeing, and stressful. But for most small business owners, it is one of the most gratifying aspects of being self employed.
Even during (and some would argue especially during) a recession, people still need loans. Setting yourself up as a lending and finance institution means that your business will be essential, regardless of what is going on in the world around you. This is definitely a major advantage as a business owner, as it adds a level of security to this higher risk business model.
It might not happen immediately, but starting a finance company can result in a passive income business model down the road. If all goes well, you can scale your finance company, eventually step out of a direct role in management. Then your profits will flow in monthly, while other people handle the minutia and day-to-day tasks on your behalf.
Since we are all living in a post pandemic world now, many of us know how valuable it can be to have a business that can be run from home. Fortunately, a finance company falls into this category nicely. You can get an office if you want… But there’s no need or pressure to do so from the beginning.
Cons
The main advantage that you have as a private finance company is by offering lower interest rates than a bank or traditional lending institution would. Either that, or dropping your qualification standards as to how much you will give to someone without assets or a decent credit score. Which is risky, and unrecommended. With that being said, there is only so much you can profit while charging reasonable interest rates. Which results in low profit margins.
If you have any visions of earning steady passive income from your freelance business within the first year or so… I encourage you to lay those aside. Your income as a finance lender will be directly linked to your hours. While owning your own finance institution business can eventually lead to consistent passive income, that is a long way down the road.
It’s no secret that lending money is a risky business. And it isn’t one you should take lightly. A good rule of thumb is to only lend an amount of money that your business can afford to lose. Just as you should never lend an amount of money to a friend that you would be upset if you never got back. Over time, this amount will increase. But it will always be risky.
And why is it risky? Because there is always the chance that you won’t get paid back. People default on loans all the time. And they wouldn’t have come looking for one in the first place if they had plenty of it. This means that you are automatically dealing with people who lack sufficient finances for one reason or another. Proceed with caution if you choose to go this route.
Starting a Finance Company Can Work, But Lead Generation is Better...
Here's Why:
I’m going to shoot straight with you here:
Starting a finance company is a high risk endeavor, and it can take years before it generates the amount of passive income necessary to fully support you.
So while there is a demand for private, micro-lending businesses in 2021…
That doesn’t mean that it’s the wisest business model for those looking to generate passive income and own their own business.
Currently, I make over 50K per month in passive income.
And I’m genuinely passionate about helping other budding entrepreneurs find the same success that I have.
So how did I do it?
Through local lead generation.
Online lead generation relies on Google’s localization powers, and strategic SEO to consistently generate new leads for small businesses.
So not only do I get to earn an income from what I do…
But I get to help other business owners succeed and thrive!
Because what do all businesses need more of?
Leads.
And the best part?
Anyone can learn to do this…
Including you.
So if you’re interested in a low risk business model for online passive income, then lead generation is for you.
