Some payday loan businesses are known for charging excessive interest rates and fees. This has given the industry a significantly poor reputation. For this reason, going into the payday loan business will usually come with a negative stigma. However, there are ways to avoid being included in the group of lenders that operate using predatory practices.
Incorporate your business. In some states, it is a requirement to form a corporation to get a license to lend money. Most small businesses start by forming a LLC, or Limited Liability Company. To do so, contact your Secretary of State’s office and obtain the forms. You may hire an incorporation firm, attorney or CPA to complete this work for you. Filing and other fees to incorporate commonly fall into the $40 to $1,000 range, not including consulting or legal fees (see Resources section below).
Get a license. To apply for a license, contact your state’s regulatory agency. This is the office that oversees the practices of lenders, real estate firms and mortgage companies. The name of this department in your state can be obtained by contacting your governor’s office. Complete the application carefully. You will likely be required to submit to both criminal background and credit checks. You must also meet a net-worth requirement ($25,000 to $100,000 in equitable assets is common) and include financial reports and articles of incorporation with your application. You will also need to purchase a surety bond and pay to have your application processed. Expect to pay $300 to $1,000 to apply for a license and a few hundred dollars for a surety bond (see Resources section below).
Obtain funds to lend. Unless you have a large amount of money to lend to your customers, you will need a credit line from a bank. Depending on your assets, credit score and strength of your business plan, obtaining a credit line often requires meetings with a banker and an underwriting process. Keep in mind, the price you will pay for money will ultimately determine the rates you charge your clients. Look for the best rates and terms (see Resources section below).
Secure a location. Payday loans can operate anywhere. However, to build and maintain a positive and professional reputation, find a location near other financial institutions such as banks and near high-end retail shops. Work with a real estate agent that is familiar with the financial services industry.
Price your loans wisely. Aside from a professional appearance, the price of your loans will be a deciding factor in the legitimacy of your operation. Most payday loan companies charge high rates and fees because their customers often have poor credit and cannot qualify for traditional loans. This often prompts lenders to charge high rates because they know their customers will pay it. Avoid this by focusing on being a volume-based lender. Do not try to make maximum profits on each loan. Instead, set monthly goals that are unit-based rather than revenue-based. The more loans you close the more money you will make and more people you will help. Do not gouge your customers.
Obey the laws. Most states have predatory lending laws that prevent consumer lending companies from charging extremely high interest rates and finance fees. Companies, however, violate these rules often. Always price your products well within the scope of the law while at the same time, be compassionate in order to get referrals and repeat business.
Don’t make risky loans. Much of your legitimacy will be determined by the strength of your borrowers. While all loans come with a specific amount of risk, lending to extremely risky borrowers will increase your default rates and likely make you known as a bottom feeder. Screen your customers thoroughly and only lend to clients with strong employment histories and minimum bank account balances. Do credit checks. Most payday loan companies do not require credit checks. However, by weeding out those with extremely poor or no credit, you can focus on providing fair products to a credit worthy customer base.
Develop a networking plan. Get to know personal bankers and finance company representatives in your market. Explain the kind of lending you do and have them refer you customers they cannot help. For example, a customer may get denied a loan from the bank he or she has an account with. When this happens, customers sometimes take their banking business elsewhere out of spite. However, when bankers have associates within the industry to help his or her customers when they can't, the customer stays happy and you gain business and the opportunity to fill an important need.
Get as much industry experience as possible. Research how payday loans are made and paid back. Don't go into the business blindly.
Write a strong business plan. A good business plan should include a start-up and operational budget, profitability projections and marketing plan for the first few years.
Spend a little more on an upscale and professional-looking office.
Keep loan amounts manageable. Small, easy to repay loans are easy to manage and will help you gain experience you'll need before expanding your products and services.
Communicate effectively with your customers. Monthly fliers, post cards and notes of appreciation are good ways to keep your customers aware that you value their business.
Develop a solid collection process.
Never operate without a license. Doing so is often grounds for criminal prosecution.
Always obey predatory lending laws.