Starting a lending business can be a bit more complex than other businesses. It’s because a lending business has diverse functions, including compliance and debt capital. All these various functions must work in consensus for the business to be successful. Scaling up the business might be even more challenging because of the capital requirements, risks, and regulations involved.
Another essential aspect you must consider when starting a lending business is how you’ll determine your clients’ eligibility. You must only give out loans to people who are likely to make repayments. One way to check their ability to make repayments is by checking their credit history.
Suppose you’re wondering how you’ll know your customers’ credit history. In that case, you may visit https://www.softpullsolutions.com/ to determine credit eligibility and limit the risks of lending to clients who may experience difficulties paying their loans.
However, starting a loan business can be immensely profitable. You can enjoy its fruits with thorough planning, proper implementation, and hard work. Here’s a step-by-step guide to starting a lending business.
1. Feasibility Analysis
Feasibility analysis means assessing if your business idea is viable. Conducting a feasibility analysis will help you know whether your business will fulfill its objectives within a reasonable time and makes sense economically. Furthermore, it can add up to any primary research you have done.
To conduct a feasibility evaluation for your lending business, you’ll need an in-depth understanding of the following:
- Business idea in terms of product or service
- Market nature of the lending business
- Customers’ needs
- The anticipated costs and expected profits
- Your business plan or model
- The human resources and expertise needed to run the business
A feasibility study involves drafting a detailed report including evaluated findings about the market, economic, technical, management, and financial viability of the proposed business idea in terms of success.
The analysis provides details for your business plans. You’ll also need this report when preparing a presentation to potential partners and investors or applying for government funding. It can also bring new ideas and address any possible issues, so you can get your business idea running without significant hitches from the start.
2. Develop A Business Plan
You must develop a business plan. It helps elaborate strategies for your operations and is vital for sourcing funds. It’ll also help you maintain your business on the right path as you evaluate your milestones compared to set objectives.
Business plans help you pinpoint significant resources crucial for the business’s success. You should determine which section of the market you’ll focus on, the target market size, and your company’s potential growth.
Do a proper risk analysis and develop a risk management framework to identify the circumstances you’ll offer loans to your customers. You’ll be required to document all these in your business plan and implement them when that time comes.
The amount of research in the planning process will help determine which business legal structure might be most suitable for your lending operations. This will also include licensing fees and taxes you may be accountable for.
Include critical sections like competitor analyses, mission, and vision statements, the management team, operations plan, and objectives. In summary, developing a good business plan assists you in determining if your business idea is entirely reasonable and helps you monitor it as you go along.
3. Determine Your Business Funding Strategy
Getting capital for any business is crucial, but it’s even much more significant for a lending company. The speed at which your customers can receive loans and the progression at which you’re able to collect and grant loans again will be particularly vital for the business life span.
Starting a lending business will be extremely challenging, if not impossible unless you’ve already acquired or inherited substantial wealth. Hence, finding or attracting external funding for the company will undoubtedly be necessary sooner or later.
Consequently, when you start a lending business, you need to evaluate these two things:
- The amount of funding required to start and implement all your business plans successfully
- How to get the necessary funding
Whether your business will be a company that lends its own money or a bank that’ll have to attract comparatively low funding from customers’ deposits, having a sound business and funding plan will be crucial. You should show your investors that you have a suitable strategy to succeed in your lending business.
4. Choose A Business Name And A Legal Structure
You’ll have different choices for a legal structure based on where you intend to start the lending business. Here are some of the most used legal business structures:
- Partnership
- Sole proprietorship
- Limited liability company (LLC)
- Not-for-profit
- Corporation
Choosing the right legal structure for your business can be daunting, which is why many business owners work with a business formation agency. This Small Business HQ review post compares two of the best business formation agencies that can help you register your lending business.
On the other hand, you’ll need to choose a business name. Remember that the name will serve as the business’s identity, so choose one that summarizes your services, mission, and objectives in just one or a few words.
You should select a name that’s easy to remember and distinguishable from other businesses. After you’ve identified a few names, visit the relevant government sites in your area to ensure that the name is not taken and is available for registration.
5. Obtain Necessary Business Permits And Licenses
Your lending business may be subject to strict regulations before you start opening. During your research and planning stage, you should be able to figure out the requirements of the government or state agency for operating such a business.
Some of these permits and licenses require regular renewal and have particular conditions linked for your business to continue its operations. Hence, it’d be best to notice this from the start.
6. Open A Bank Account
Before you start operating your business, you need to choose a reputable bank you’ll work with. This is because you need to open a business account to hold your business funds.
You must contact the bank you intend to open an account with to learn about their business account requirements. It’s always a great idea to weigh your options and choose the best plan for your business. Some banks’ requirements are straightforward, while others are somewhat complicated.
Another thing to remember is to keep personal finances separate from your business account. This will make it easier for you to monitor your company income and file your taxes. Opening a business bank account is pretty simple, almost the same as opening a personal one. Many banks provide accounts suitable for businesses. All you have to do is contact your preferred bank and ask about their features and rates.
7. Look For An Office
If you’re planning to get a physical office for your business or, depending on how you plan to run the company, arrange for leased spaces. You can start by calling commercial realtors in your location.
If you intend to use a brick-and-click structure to run the business, you’ll also need to arrange for office furniture and utilities. You must include these expenses would have been estimated in your business plan. Thus, this is another crucial reason you should have a business plan.
8. Get Business Insurance
Getting insurance is another big part of the business continuity strategy. Business insurance helps keep the company running in unfortunate situations such as theft, disaster, or fire. Insurance also provides coverage for lawsuit-related issues in case they arise or indemnity if you lose a vital member of your management.
Moreover, if you plan to hire people as part-time or full-time employees of your company, you may have to obtain worker insurance or register with appropriate agencies. The type and number of employees you intend to employ will be based on how you plan to implement your business model.
9. Set Up Business Accounting And Systemize Your Operations
Setting up accounting and a system for record-keeping to ensure that you comply with taxes your business is liable for is extremely important. Depending on where your lending company will be operating, business documents like financial statements and annual reports, copies of formal certificates, and lists of shareholders generally need to be kept for a minimum amount of time. All corporate and tax filings are also to be maintained for a required amount of time.
Therefore, you must comprehensively prepare the business. Set up a system or method to process bills, orders, pay bills, taxes, and employees. Generally, make the operationalization of your business automatic and effective as much as possible. It’ll also help in scaling up your business.
10. Brand And Market Your Business
Creating a professional logo can make your business appear professional and accomplished. Create other marketing tools like business cards, promotional materials, and letterheads for your company. Create a marketing plan for your lending products and services that target your intended customers.
You can also use digital marketing, such as Google AdWords and social media advertising, to reach your target audience. Nowadays, the internet plays a crucial role in business marketing, whether small or big. Use this to your advantage to reach a wider audience.
Conclusion
A lending business is undoubtedly a potentially profitable venture. Before anything, conduct a viability test to see the company’s viability, whether it’s a side hustle or a full-time job.
Starting a lending business will require developing a business plan and obtaining the necessary permits and licenses from relevant agencies or the government. You can build a successful, lucrative lending business by establishing and maintaining solid relationships with investors and lenders.
