How to Set Up a Private Lending Business

by Maggie Gebremichael - Updated September 26, 2017
Hands exchanging money

Traditional banks or financial institutions are not the only source of lending. Private lenders provide financing to various businesses. You can establish a small business that lends capital to startups or a corporation that targets companies with more than $500,000 in annual gross revenue. As a private lender you will probably not become very involved with management decisions.

Develop a business plan that describes your company’s strategies, guidelines and short- and long-term goals. Indicate if you plan to focus on a particular type of company, such as energy or technology startups. Quantify expected revenue, such as loan interest and fees, along with expected expenses, such as those related to employees, overhead and writeoffs. Describe how you will evaluate risk, by conducting extensive credit and criminal background checks for all applicants.

Secure capital. You will not be able to get a loan from a bank so that you can loan money to other companies. Sources of capital vary--they may include friends, family members and colleagues. Cultivate investors from among wealthy individuals or venture capital businesses to create a pool of money. You need a relatively liquid source of funding, so avoid storing money, such as in long-term certificates of deposits.

Advertise your business. Place ads in a local business journal or chamber of commerce. However, such advertising can cause you to be inundated with inquiries or loan requests. If you have a limited advertising budget, rely on word-of-mouth awareness, and limit public outreach. By hosting a student or community entrepreneur grant competition, you will receive multiple proposals while building recognition about your company. Join professional organizations like the National Business Incubation Association.

Analyze loan applicants carefully. Assess years in business, credit scores and assets. If five people apply as partners for a single loan, check each applicant's background. Determine whether any applicant has defaulted on a loan. Review projected sales and costs as well as supporting evidence. For example, a person might approach you for a loan and claim that the company costs are under $10/product. Request evidence that demonstrates total cost. Evaluate whether a market exists for the product or service and assess any competitiors.

Prepare and record a legal contract with each approved loan application. Although some oral contracts are binding, create a written agreement that reflects the lending terms. Consult with a certified accountant and a licensed attorney to address your company’s financial and legal exposure through taxes and other liabilities.

Tips

  • Private lenders invest in different ways. Make sure to identify your target audience (small businesses, startups, student loans) to avoid overextending yourself.

About the Author

Maggie Gebremichael has been a freelance writer since 2002. She speaks Spanish fluently and resides in Texas. When she is not writing articles for eHow.com, Gebremichael loves to travel internationally and learn about different cultures. She obtained an undergraduate degree with a focus on anthropology and business from the University of Texas and enjoys writing about her various interests.

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