A payday loan company lends money to customers short on cash between paychecks. Each paycheck is used as collateral on each loan. These types of loans are usually short term and rather risky. For this reason, payday loans can be quite profitable for lenders. Starting a payday loan company involves several steps but is not extremely complicated.
Items you will need
- Business plan
- Articles of incorporation
Write a strong business plan, including a list of your assets and data on prospective payday loan clients. Include a detailed marketing plan to attract customers with telephone book advertising, vibrant signage, direct mail and networking with other financial institutions. Detail these plans carefully. Contact an accountant or use a business plan template to guide you.
Form a corporation. Most states require payday loan businesses to be incorporated. It is also wise to form an LLC (limited liability company) to protect your personal assets and keep them separate from those owned by the business. Contact your state department of revenue to obtain a copy of the registration paperwork. An attorney or firm that specializes in setting up corporations can be helpful. Expect to pay a filing fee. Most fall into the $50 to $1,200 range, depending on the type of corporation you form. Start small. Most payday loan companies opt to form an LLC first.
Apply for a license. Contact the agency in your state that regulates payday loan companies. For example, in Illinois contact the Department of Financial and Professional Regulation (IDFPR). Ask a representative to send or e-mail you a license application. Complete each document as directed. You will be required to provide information including business bank account numbers, Social Security number and resume. You may also be asked to submit to credit and criminal background checks. Expect to pay an application fee of several hundred to $1,000. These fees are typically non-refundable.
Examine your net worth. Depending on your state, your company may be required to meet net-worth requirements to lend money to payday customers. Requirements in the $25,000 to $100,000 (equitable) are common. Organize all of your assets, such as lists of real estate and office equipment, stocks, bank account balances and annuities if you have them. Attach this information to your license application.
Purchase a surety bond to protect you should you get sued. Most insurance companies sell surety bonds, however, you can also purchase them from surety companies. Depending on the amount your state requires, most bonds run from $300 to $2,000 or more. A representative from your state regulatory agency will advise you on the amount of bond you'll need.
Select a method of lending. Find a location in a busy retail area if you plan to rent an office. Storefronts are ideal. If you plan to lend money online, a small office with two or three work stations will suffice. Contact a real estate agent experienced in finding property for retail businesses.
Secure a line of credit. Contact a commercial lender and show a representative your business plan, license and financials. If you qualify, your lender will issue you a line of credit to serve as your operating capital from which to make loans. Negotiate the best interest rate possible. Keep in mind that your credit score and assets will determine the amount of credit and rate for which you qualify.
Set pricing on your loans. Begin by calling other payday loan firms in your market. Ask what interest rates and finance fees they charge. Be competitive. Some of your interest rates will be determined by the rate you are paying the bank. Aim to be volume-driven. Focus on doing as much business as you can over making large profits on every loan.
Don't make risky loans. Screen your customers well. Do credit checks if you need to.
Always obey state lending laws. These laws limit the amount of interest and finance fees that can be charged. Violations can result in fines and/or imprisonment.
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