Starting a small loans business is a great way to use your knowledge and expertise to enrich the community. Granting a small loan could help a small business to stay afloat. Alternatively, it could help turn a side hustle into an established business. In this article, we go over six points to consider when starting your own small loans business.
Table of Contents
1. Define Your Niche
The first step to starting a small loan business is figuring out your niche – the who and the what.
Who are you providing loans to? Are they individuals or are they businesses?
What kind of loans are you offering? Student loans? Car loans? Bridging loans? Start-up loans?
Your niche will determine what qualifications and licenses you require as well as your regulatory obligations.
2. Set Your Risk Appetite
After establishing your niche, consider your risk appetite. When granting loans, there is always a risk that you won’t be paid back. Thus, its important that you are able to distinguish the good loans from the bad ones.
It would be beneficial to create a comprehensive checklist that can be used to assess loan applications. As a general guide, consider the following:
- Purpose of the loan;
- The value of the loan;
- Applicant’s age, income and occupation;
- Whether collateral has been provided;
- The applicant’s financial history; and
- The proposed terms of the loan.
In addition to the checklist, have a clear internal lending policy. This should help guide your business (and any employees) to make smart lending decisions.
3. Fund Your Business
Before you can even provide a loan, you need to have funds. Consider whether you are willing to contribute some funds personally or if you will turn to investors. Securing that initial funding may be a difficult task, however, it will become easier over time as you establish yourself as a reputable loan provider.
4. Set Your Rates
When providing loans, you are not only expecting to receive the money back, but to make a profit. Hence it’s important that you set an optimal return on investment (ROI). You should consider factors such as the term of the loan, whether collateral is provided, and the applicant’s credit history. It’s also important to account for your expenses and the fact that you are taking on a risk.
5. The Loan Agreement
The terms of a loan agreement should always be documented in writing. At a minimum, the loan agreement should set out:
- The purpose of the loan;
- Fees and charges;
- Term of the loan; and
- The process to occur if the borrower defaults.
6. Place Of Business
Last but not least, consider where will you be conducting your business.
Face to Face
The most obvious option is to set up an office and have face-to-face meetings. This gives you a better chance to assess the applicant beyond their application form. You are able to ask for further information on the spot and take in how they conduct themselves. However, this also means that you will have to consider rent as an expense.
Online
Alternatively, you could conduct your business completely online. You’ll want to have measures in place to ensure that customers are well aware of the risks and their obligations. This means setting up a website, providing financial resources, and the option to conduct virtual meetings.
Conclusion
Starting a small loans business can be an exciting business venture, however, it does come with great risks. In order to strike a balance between risk and reward, ensure that you are knowledgeable and well protected. If you are after more tailored advice, we advise that you contact your business advisor and or lawyer.
