Starting a loan business can be very profitable. With proper planning, execution and hard work, you can enjoy great success. Below you will learn the keys to launching a successful loan business.
Importantly, a critical step in starting a loan business is to complete your business plan. To help you out, you should download Growthink’s Ultimate Business Plan Template here.
14 Steps To Start a Loan Business:
- Choose the Name for Your Loan Business
- Develop Your Loan Business Plan
- Choose the Legal Structure for Your Loan Business
- Secure Startup Funding for Your Loan Business (If Needed)
- Secure a Location for Your Business
- Register Your Loan Business with the IRS
- Open a Business Bank Account
- Get a Business Credit Card
- Get the Required Business Licenses and Permits
- Get Business Insurance for Your Loan Business
- Buy or Lease the Right Loan Business Equipment
- Develop Your Loan Business Marketing Materials
- Purchase and Setup the Software Needed to Run Your Loan Business
- Open for Business
1. Choose the Name for Your Loan Business
The first step to starting a loan business is to choose your business’ name.
This is a very important choice since your company name is your brand and will last for the lifetime of your business. Ideally you choose a name that is meaningful and memorable. Here are some tips for choosing a name for your loan business:
- Make sure the name is available. Check your desired name against trademark databases and your state’s list of registered business names to see if it’s available. Also check to see if a suitable domain name is available.
- Keep it simple. The best names are usually ones that are easy to remember, pronounce and spell.
- Think about marketing. Come up with a name that reflects the desired brand and/or focus of your loan business.
2. Develop Your Loan Business Plan
One of the most important steps in starting a loan business is to develop your business plan. The process of creating your plan ensures that you fully understand your market and your business strategy. The plan also provides you with a roadmap to follow and if needed, to present to funding sources to raise money for your business.
Your business plan should include the following sections:
- Executive Summary – this section should summarize your entire business plan so readers can quickly understand the key details of your loan company.
- Company Overview – this section tells the reader about the history of your loan business and what type of loan business you operate. For example, are you a secured loan, unsecured loan, home equity loan, or personal loan business?
- Industry Analysis – here you will document key information about the loan industry. Conduct market research and document how big the industry is and what trends are affecting it.
- Customer Analysis – in this section, you will document who your ideal or target customers are and their demographics. For example, how old are they? Where do they live? What do they find important when purchasing services like the ones you will offer?
- Competitive Analysis – here you will document the key direct and indirect competitors you will face and how you will build competitive advantage.
- Marketing Plan – your marketing plan should address the 4Ps: Product, Price, Promotions and Place.
- Product: Determine and document what products/services you will offer
- Prices: Document the prices of your products/services
- Place: Where will your business be located and how will that location help you increase sales?
- Promotions: What promotional methods will you use to attract customers to your loan business? For example, you might decide to use pay-per-click advertising, public relations, search engine optimization and/or social media marketing.
- Operations Plan – here you will determine the key processes you will need to run your day-to-day operations. You will also determine your staffing needs. Finally, in this section of your plan, you will create a projected growth timeline showing the milestones you hope to achieve in the coming years.
- Management Team – this section details the background of your company’s management team.
- Financial Plan – finally, the financial plan answers questions including the following:
- What startup costs will you incur?
- How will your loan business make money?
- What are your projected sales and expenses for the next five years?
- Do you need to raise funding to launch your business?
3. Choose the Legal Structure for Your Loan Business
Next you need to choose a legal structure for your money lending business and register it and your business name with the Secretary of State in each state where you operate your business.
Below are the five most common legal structures:
1) Sole proprietorship
A sole proprietorship is a business entity in which the business owner and the business are the same legal person. The owner of a sole proprietorship is responsible for all debts and obligations of the business. There are no formalities required to establish a sole proprietorship, and it is easy to set up and operate. The main advantage of a sole proprietorship is that it is simple and inexpensive to establish. The main disadvantage is that the owner is liable for all debts and obligations of the business.
A partnership is a legal structure that is popular among small businesses. It is an agreement between two or more people who want to start a loan business together. The partners share in the profits and losses of the business.
The advantages of a partnership are that it is easy to set up, and the partners share in the profits and losses of the business. The disadvantages of a partnership are that the partners are jointly liable for the debts of the business, and disagreements between partners can be difficult to resolve.
3) Limited Liability Company (LLC)
A limited liability company, or LLC, is a type of business entity that provides limited liability to its owners. This means that the owners of an LLC are not personally responsible for the debts and liabilities of the business. The advantages of an LLC for a loan business include flexibility in management, pass-through taxation (avoids double taxation as explained below), and limited personal liability. The disadvantages of an LLC include lack of availability in some states and self-employment taxes.
4) C Corporation
A C Corporation is a business entity that is separate from its owners. It has its own tax ID and can have shareholders. The main advantage of a C Corporation for a loan business is that it offers limited liability to its owners. This means that the owners are not personally responsible for the debts and liabilities of the business. The disadvantage is that C Corporations are subject to double taxation. This means that the corporation pays taxes on its profits, and the shareholders also pay taxes on their dividends.
5) S Corporation
An S Corporation is a type of corporation that provides its owners with limited liability protection and allows them to pass their business income through to their personal income tax returns, thus avoiding double taxation. There are several limitations on S Corporations including the number of shareholders they can have among others.
Once you register your loan business, your state will send you your official “Articles of Incorporation.” You will need this among other documentation when establishing your banking account (see below). We recommend that you consult an attorney in determining which legal structure is best suited for your company.
4. Secure Startup Funding for Your Loan Business (If Needed)
In developing your loan business plan, you might have determined that you need to raise funding to launch your business.
If so, the main sources of funding for a loan business to consider are personal savings, family and friends, credit card financing, bank loans, crowdfunding and angel investors. Angel investors are individuals who provide capital to early-stage businesses. Angel investors typically will invest in a loan business that they believe has high potential for growth.
5. Secure a Location for Your Business
There are a few key things you’ll want to consider when choosing a location for your private lending business. You’ll want to think about the demographics of the area, as well as the availability of potential customers. You’ll also want to make sure that the location is zoned for a business like yours.
Another important factor to consider is competition. You’ll want to find an area where there aren’t already too many loan companies competing for customers.
In addition, you’ll want to make sure there is easy access to roads and highways in the area of the location. Finally, the property itself should have enough room for you to set up your office and meet with clients.
6. Register Your Loan Business with the IRS
Next, you need to register your business with the Internal Revenue Service (IRS) which will result in the IRS issuing you an Employer Identification Number (EIN).
Most banks will require you to have an EIN in order to open up an account. In addition, in order to hire employees, you will need an EIN since that is how the IRS tracks your payroll tax payments.
Note that if you are a sole proprietor without employees, you generally do not need to get an EIN. Rather, you would use your social security number (instead of your EIN) as your taxpayer identification number.
7. Open a Business Bank Account
It is important to establish a bank account in your loan business’ name. This process is fairly simple and involves the following steps:
- Identify and contact the bank you want to use
- Gather and present the required documents (generally include your company’s Articles of Incorporation, driver’s license or passport, and proof of address)
- Complete the bank’s application form and provide all relevant information
- Meet with a banker to discuss your business needs and establish a relationship with them
8. Get a Business Credit Card
You should get a business credit card for your own loan business to help you separate personal and business expenses.
You can either apply for a business credit card through your bank or apply for one through a credit card company.
When you’re applying for a business credit card, you’ll need to provide some information about your business. This includes the name of your business, the address of your business, and the type of business you’re running. You’ll also need to provide some information about yourself, including your name, Social Security number, and date of birth.
Once you’ve been approved for a business credit card, you’ll be able to use it to make purchases for your business. You can also use it to build your credit history which could be very important in securing business loans and getting credit lines for your business in the future.
9. Get the Required Business Licenses and Permits
The licensing requirements to start a loan business vary by state. You may need a business license, a loan broker license, and a credit services organization license. Make sure to check with the state where you plan to start your business for specific details and requirements.
10. Get Business Insurance for Your Loan Business
There are a multiple types of insurance that you will need to have in order to operate a loan company.
Some business insurance policies you should consider for your loan business include:
- General liability insurance: This covers accidents and injuries that occur on your property. It also covers damages caused by your employees or products.
- Auto insurance: If a vehicle is used in your business, this type of insurance will cover if a vehicle is damaged or stolen.
- Workers’ compensation insurance: If you have employees, this type of policy works with your general liability policy to protect against workplace injuries and accidents. It also covers medical expenses and lost wages.
- Commercial property insurance: This covers damage to your property caused by fire, theft, or vandalism.
- Business interruption insurance: This covers lost income and expenses if your business is forced to close due to a covered event.
- Professional liability insurance: This protects your business against claims of professional negligence.
Find an insurance agent, tell them about your business and its needs, and they will recommend policies that fit those needs.
11. Buy or Lease the Right Loan Business Equipment
To run a loan business, you need some basic equipment including a computer with internet access, a phone, and a fax machine. You will also need a printer to print out loan contracts.
12. Develop Your Loan Business Marketing Materials
Marketing materials will be required to attract and retain customers to your loan business.
The key marketing materials you will need are as follows:
- Logo: Spend some time developing a good logo for your loan business. Your logo will be printed on company stationery, business cards, marketing materials and so forth. The right logo can increase customer trust and awareness of your brand.
- Website: Likewise, a professional loan business website provides potential customers with information about the services you offer, your company’s history, and contact information. Importantly, remember that the look and feel of your website will affect how customers perceive you.
- Social Media Accounts: establish social media accounts in your company’s name. Accounts on Facebook, Twitter, LinkedIn and/or other social media networks will help customers and others find and interact with your loan business.
13. Purchase and Setup the Software Needed to Run Your Loan Business
The software you’ll need to run a loan business include a loan origination system (LOS), a loan processing system, and a loan servicing system.
The loan origination system is the front end of your company, where borrowers fill out forms, provide documentation, and undergo review for credit. The loan processing system records the information associated with the loans you make—things like origination fees, interest rates, credit limits, and payments received. There’s also a back-end system that manages your borrowers—collecting payments and insurance premiums as well as servicing loans each month.
14. Open for Business
You are now ready to open your loan business. If you followed the steps above, you should be in a great position to build a successful business. Below are answers to frequently asked questions that might further help you.
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How to Start a Loan Company FAQs
Is it hard to start a loan business?
It is not hard to start a loan business if you familiarize yourself with the industry. In today’s competitive business environment, running a loan service company can be daunting and expensive. The key is building relationships with the right people so that your brand name increases in popularity. When this happens, you will find it easier to connect with potential customers and grow your business as well as prospects for investors who are looking for companies for investment capital.
How can I start a loan company with no experience?
There are a few ways to start a lending business with no experience. One way is to partner with an existing company that offers loans. Another way is to start your own company and provide loans to people who need them.
To start your own company, you'll need to do some research on the best way to offer loans. You'll also need to create a business plan and get funding for your business. Once your business is up and running, you'll need to find customers and make sure they're happy with your services.
If you're not sure how to start a loan business, there are a lot of resources available online and in libraries. You can also talk to someone who's already in the loan business to get advice.
What type of loan business is most profitable?
There is no definitive answer to this question, as the profitability of a loan business will vary depending on the type of loan products offered, the target market, and the level of customer service provided. However, short-term and payday loans are some of the most profitable loan products. They tend to have low default rates, and borrowers can complete their repayments within a short period. Therefore, money lenders get their money back faster.
How much does it cost to start a loan business?
The cost of starting a loan business varies depending on the services you offer as well as the physical location of your business. The startup costs for loan businesses typically include the cost of establishing your company, hiring employees, and developing a marketing strategy.
What are the ongoing expenses for a loan business?
The ongoing expenses related to businesses offering loans can vary based on the size of the business and whether it is a traditional brick-and-mortar organization or an online lender. Typically, ongoing expenses will be higher for brick-and-mortar establishments due to the need to pay for rent, utilities, and maintenance of the office space. Administrative fees are common, along with the cost of maintaining loan books and employee salaries.
How does a loan business make money?
A loan business makes money by lending money and charging interest on the loans it issues. It also may charge other fees, such as origination or late payment fees. Another way for a loan business to make money is by trading loans—buying and selling them with other business owners or financial institutions.
Is owning a loan business profitable?
Yes, owning a loan business can be profitable. One reason is that there is a large potential market for loans. In addition, the interest rates vary widely and can be quite high, which can result in sizable profits. Furthermore, the business can be automated to a certain extent, which can further reduce costs and improve profits.
Why do loan businesses fail?
There are a number of reasons why other lenders may fail. One reason is that the company may be unable to generate enough revenue to cover its costs and repay its loans. Additionally, the company may have insufficient funds to cover potential loan defaults. Poor management and fraud are also common reasons for loan business failures.