8 Steps to Starting Your Own Loan Company

8 Steps to Starting Your Own Loan Company

In the past year, 83.5 million people in the U.S. have taken out a loan. If you’re thinking of starting a loan company it can be extremely beneficial and rewarding.

In this article, you’ll learn all about the requirements and licensing necessary to start your own business. Read on to discover how to start a loan company. 

1. Choose Your Niche

You can open a broader loan process of auto, personal, and home loans, but it’s best to focus on one niche. Focus on getting the licensing and specific applications necessary for the niche you choose, build your client base, and then expand into other areas. 

Personal private loans don’t require a license, but there is a limit because of state usury laws. Mortgages are regulated by the National Mortgage Licensing System, and auto loans are regulated by the Consumer Financial Protection Bureau. Pay attention to the laws for which niche you choose. 

Before beginning, research usury limits since they vary state by state. Some states limit the number of loans and the total allowable interest rate. 

Are you wondering the reasons for personal loan? It’s important to understand why most loans are taken out before deciding on a niche.

2. State and Federal Loan Laws 

You can have your loan business completely online, but there are still government regulations that must be followed. There are laws that limit how you offer your services that vary state to state. 

Some legal concerns to keep in mind:

  • Certain states cap interest rates
  • Some states ban all payday loans
  • Some states ban storefront payday loans but not online loans

States that have made payday loans illegal:

  • Georgia
  • Connecticut 
  • Arkansas
  • Arizona
  • Maryland
  • Massachusetts
  • New York
  • New Jersey
  • North Carolina
  • Vermont
  • Pennsylvania
  • District of Columbia
  • West Virginia

For a deeper look into lending laws by state, take a look at this interactive map. Also, if the borrower is part of the armed forces you can’t exceed a 36% annual interest rate

3. Business Plan Time 

Now that you understand the legalities and have chosen your niche, it’s time to come up with a business plan. You’ll want to do market research determining how you’ll get your company’s name out there. 

Have an idea of what you’ll do, and get an edge on your competition. Also, determine your interest rates and lending strategy for your business. You’ll also want financial data such as profit and loss statements, the cost of your business, and cash flow statements. 

4. Draw up Contracts

Before you begin, it’s imperative you meet with a lawyer and create truth-in-lending contracts and develop any other contracts necessary. These documents will be determined based on the services you’re offering.  

When you begin, you’ll also want information from borrowers such as W2’s and pay stubs. If not, a lender can go against the law and face penalties or fines. 

5. Get Merchant Services

You’ll need to acquire merchant services before launching your business. You’ll be collecting payments electronically so you’ll want a secure form of card processing. It’s ideal if you accept both credit cards and ACH payments.

It can be hard to get approved by banks since lenders can be considered high-risk. But there are some banks out there that will give you a chance, so don’t get discouraged.  

6. Marketing

You’ll want to set up a website. Consider hiring a website designer who can make your site look clean and attractive. WordPress is an example of a popular and user-friendly platform. Once your web designer has created your site, you can handle the upkeep.

Make sure they make your site GDPR compliant and block foreign ISP addresses. Once that’s completed, focus on establishing and building your brand. Offer free content and blog posts on your site about using loans wisely.

You’ll want to focus on the pros of lending such as short-term borrowing saving companies and people from financial loss. Maybe they have unexpected bills or are close to having their car repossessed.

If you’re honest about the reasons for taking out a loan, people will trust you more. Also, figure out who your target audience is and target your ads and marketing campaigns toward them. 

7. Create Capital

When you’re about to begin your company, it’s important to have enough funding to get started. You’ll also need capital to deposit funds into accounts as well. Capital can come from angel investors, crowd-funded sites, private equity firms, and many other sources. 

You’ll want to wait to raise funding until after you’ve received and completed your necessary licensing and applications. Some private investors might be interested in helping with funding for interest from a loan or equity. You could also use a mixture of money from private investors plus a commercial loan.

8. Continue to Grow 

Since the laws are always changing, it’s important to be open to evolving your business. Always try to gain more knowledge and experience for growth. If your state eventually bans online payday loans, you can look into title lending or commercial loans.

Since it’s a high-risk industry, it’s important to be adaptable to change. 

How to Start a Loan Company

Now that you understand how to start a loan company, you should feel more comfortable in launching your business. Remember to fully focus on the different laws in your area before beginning, and always stay up to date since laws can change fast.  

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