How to Start a Payday Loan Business

  Reviewed by: Michelle Seidel, B.Sc., LL.B., MBA
  Written by: Heather Skyler      Updated October 25, 2018
Business woman thinking account

Payday loans are very short-term loans with high interest rates. Typically under $1,000, payday loans essentially provide people in need of quick cash with an advance on their paycheck. Although it costs borrowers quite a bit to take out a payday loan – due to the high interest rates and fees involved – these loans are often a last resort for those in dire financial straits. While this lending practice is sometimes called predatory, payday loans also help people through a tough time. Despite the negative associations with being a payday lender, people always seem to need this type of service.

Research Locations

You won't need a lot of space in order to set up a payday loan business, but you will need a storefront with a counter area for doing business. Most payday loan companies are located in underserved communities or low-income neighborhoods. Because your clientele will likely consist of people on the lower end of the earning spectrum, it's a good idea to find a space to rent in a suitable neighborhood.

Create a Business Plan

Many lenders will require a strong business plan if you want a business loan, especially if you’re trying to get a loan backed by the Small Business Administration. A business plan should clearly explain the idea behind your company. Your plan should also include whom you expect your client base to be, current and projected financials and a detailed explanation of how the business will have enough cash flow to cover ongoing business expenses and new loan payments.

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Get a Small Business Loan

It's likely you'll need a loan to get your new business started. One option is a small business loan. The Small Business Administration (SBA) works with approved lending partners to help small businesses obtain startup capital. The SBA doesn’t provide loans, it guarantees them. If a loan is given an SBA guarantee, lenders know the SBA believes in the soundness of the business and its ability to repay the loan.

If you default on an SBA loan, the SBA is responsible for paying back a certain percentage. Depending on the total loan amount, the SBA can guarantee 75 to 85 percent of a loan. Because the application process can be tedious and time-consuming, many small companies fail to take advantage of getting backing from the SBA, but it is definitely worth the time and effort.

Follow State Regulations

A payday loan business comes with a decent share of regulations and legal requirements. Be sure you understand what these are before getting started. In fact, each state has its own regulations for payday loans. For example, in California, payday lenders can only loan up to $300; in Delaware, a lender can provide a loan up to $1,000.

Follow Federal Regulations

According to the federal Truth in Lending Act, lenders must disclose the total cost of the loan to their borrowers. Payday lenders are required to tell borrowers the amount of the finance charge and the annual percentage rate in writing before a customer signs for the loan.

Be Aware of New Regulations and Rules

In October 2017, the Consumer Financial Protection Bureau issued new rules about payday loans. Under these rules, lenders are required to assess whether or not a borrower will be able to repay the loan while still meeting basic living expenses and other financial obligations. The rules also limit the number of loans one borrower can make in quick succession to three. The new rules take effect in July 2019. If you plan to start a payday loan business, make sure to stay abreast of rules that govern the industry.

Consider Hiring a Lawyer

An experienced lawyer can help you draft a loan agreement for use in your new business. Because this type of business comes with so many regulations and legal requirements, you'll want to get started on the right legal and ethical foot. The loan agreement should spell out the terms and conditions of the loan as well as the interest rates, date of maturity for repayment and the follow-up action in case of default.

Determine Borrower Eligibility

Decide how you will determine who is eligible for a loan. What will you require? Most payday loan companies require a recent pay slip from the borrower as well as a copy of last year's tax return. It's also smart to make a copy of the borrower's photo I.D. and Social Security card, and to have procedures in place to keep this information safe. You can go over these details with the lawyer as well, to make sure you've got all of your legal ducks in a row.

Advertise and Open for Business

If you're in the right neighborhood, your store signage may be enough to draw in customers. Also, consider advertising online, at bus stops or in weekly newspapers. When you're ready to go, open the doors and start helping people get the short-term funding they need.

About the Author

Heather Skyler is a business journalist and editor who has written for wide variety of publications, including Newsweek.com, The New York Times and Delta's SKY magazine. She has a bachelor's degree in English from Miami University and a master's degree in writing from the University of Washington in Seattle. Before writing for a variety of publications, she taught business writing in Seattle.

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