You don't have to be a millionaire to start your own finance company. In fact, starting a finance company or starting a loan company that works in microloans can often be done with as little as $50,000 in upfront costs. This is a business that can often be started while working from home or even on a part-time basis working nights and weekends, negotiating loans and leases for several thousand dollars each month.
Selecting a Finance Company Business Model
Unlike the big banks, finance companies seldom try to be all things to all people. Selecting a niche is particularly important if you're starting a small firm. According to the U.S. Federal Reserve, almost all financing companies are highly specialized, with the majority of their assets in one of three specific types of credit:
- Consumer credit: This includes credit cards, payday loans and personal lines of credit, but for a finance company, it usually entails leasing and loans for specific purchases, like appliances, furniture or cars.
- Business credit: This includes loans and credit cards strictly for businesses. More than 50% of business credit assets consist of equipment leases and loans. Vehicle financing for businesses is also included but is a small proportion of these companies' transactions.
- Real estate credit: This involves mortgages where the property is used as collateral for the loan amount. The majority of these loans are for family loans, with commercial and industrial real estate accounting for only a small portion.
Once you have identified the market on which you will focus, you will have to decide if you're going to be financing loans and leases yourself or if you will be working as a broker, taking applications and forwarding them to other companies. Because there is always a chance that clients will default on payments, it's a good idea to have a way of spreading risk if you plan to finance loans yourself, either through individual investors or by transferring some of your leases or loans to other companies.
Depending on the scope and scale of your business, you will likely want to incorporate or form a partnership. A limited liability company will provide you with some personal protection if your company runs into trouble, while a sole proprietorship won't give you any protection at all. Talk to an attorney and an accountant with experience in the financial services industry to get the best advice.
Understanding Your Market
As with any business, it's vital that you understand your market, including both your potential customers and your competition. Having competitive interest rates and fees will certainly be important, but there are other factors that will also affect your business success, including your accessibility. Having a used car dealer or an appliance salesperson personally introduce you to a potential client would be much more effective in capturing client attention than just having one more financial services website on the internet.
There are several differences among consumer, business and real estate credit of which you should also be aware. According to the Federal Reserve, finance charges vary significantly among these markets, as do revenue and expenses. However, the return on assets, which measures income generated from loans, works out to be about the same in all three sectors.
Of the three types of credit, consumer credit companies are by far the most numerous. Consumer credit accounts for about half of the industry's business. Auto lenders tend to have the lowest operating expenses, partially because the auto dealers take on a lot of the work in selling leases and loans on their lots. Personal loan companies have higher revenue per dollar lent and higher operating costs due to smaller loan amounts and higher risk.
Franchising Opportunities for Finance Companies
Buying a franchise can be a great way to start a lending business even if you don't have a massive pile of cash yourself. You can buy a franchise for as little as $25,000. You will have to be financially solvent, however, so expect to have a minimum reserve of cash on hand in addition to the franchise fee or a minimum net worth of about $150,000. Some of the benefits of buying a franchise can include:
- Training and support
- Back office support
- Client leads
- Marketing materials
- Health insurance
While each franchise can vary, you may also have the ability to begin working on a part-time basis or even working from home since all you really need is a laptop and the franchise company's software. If you're not able to pay the full franchise fee up front — you guessed it — financing is usually available.
On the other hand, keep in mind that some franchise opportunities are essentially commission-based sales positions. You find people looking for loans, process applications and earn a commission of anywhere between 1% and 5%. Be certain to inquire about protected territories, the nature and quality of leads, how the franchisor's interest rates compare to the competition and what happens to your commission should a borrower start missing payments.
Finance Company Licensing Requirements
Any small finance company has to be licensed by the state in which you operate. However, all states work with the Nationwide Multistate Licensing System, which has materials, forms and educational resources that apply to all states. In addition to fulfilling state requirements, you will need to register your business with the Nationwide Multistate Licensing System.
In Massachusetts, for example, you can apply for a finance company license with the Massachusetts Department of Banks. The requirements and fees can vary depending on the type of financing you will provide. The fee for a car loan company or a retail installment finance company is $1,000. In addition, you will need an FBI background check and credit report on each owner or controlling person of your company.
These licenses are over and above the requirements for any small business, including a local business license and registering with the IRS and your state tax department for employee payroll taxes. Additionally, you will need business insurance, including liability insurance, before you can start finding clients.
Individual Licensing Requirements
In addition to your company being licensed, you will need to research the licensing requirements for yourself as an individual as well as any staff you plan to hire. As with your company, anyone working for you as a loan agent or sales representative will have to create an account with the Nationwide Multistate Licensing System.
The requirements for you and your employees depend on your state as well as the types of loans you plan to process. Anyone who wants to take mortgage applications or negotiate terms for a mortgage between consumers and mortgage companies in California, for example, requires a state mortgage loan originator license. Anyone who wants to process his own loans to consumers in California must also hold a valid real estate license.
Before hiring anyone for your company, you will need to ensure that they are already licensed or that they can pass the requirements for licensing. Because your employers will be processing transactions for significant amounts of money, you will need to ensure that they are trustworthy and can pass the required criminal background checks and credit checks required by state laws.
- Federal Reserve: Survey of Finance Companies, 2015
- Franchise Direct: Financing and Loan-Providing Franchise Opportunities in United States of America
- Franchise Direct: Success Member Inc.
- Franchise Direct: Commercial Capital Training Group
- Nationwide Multistate Licensing System Resource Center: Getting Started: State-Licensed Individuals
- California Department of Real Estate: How to Obtain a Mortgage Loan Originator License
- Mass.gov: Apply for a Finance Company License
- New York State: Information and Resources for Sales Finance Companies
A published author, David Weedmark has advised businesses on technology, media and marketing for more than 20 years and used to teach computer science at Algonquin College. He is currently the owner of Mad Hat Labs, a web design and media consultancy business. David has written hundreds of articles for newspapers, magazines and websites including American Express, Samsung, Re/Max and the New York Times' About.com.