Now more than ever--with consumers and small businesses direly in need of financial assistance--is the perfect time to start a micro-lending business. Of course, that's assuming you are fortunate enough to have disposable capital. If this is something you are considering, today on the Rules of Thumb blog from MoneyThumb we would like to share a complete guide to starting a micro-lending business created by HowToStartanLLC.com.
We have not found a guide more detailed and one that covers every question you could have about starting a micro-lending business. The guide contains 9 definitive steps for starting your micro-lending business. For your reading convenience, below is Step One from that guide:
Start a micro-lending company by following these 9 steps:
You have found the perfect business idea, and now you are ready to take the next step. There is more to starting a business than just registering it with the state. We have put together this simple guide to starting your micro-lending company. These steps will ensure that your new business is well planned out, registered properly, and legally compliant.
STEP 1: Plan your Business
A clear plan is essential for success as an entrepreneur. It will help you map out the specifics of your business and discover some unknowns. A few important topics to consider are:
- What are the startup and ongoing costs?
- Who is your target market?
- How much can you charge customers?
- What will you name your business?
Luckily we have done a lot of this research for you.
What are the costs involved in opening a micro-lending company?
Micro-lenders typically don’t have a lot of overhead, though you’ll likely need to hire a loan processor, a collector, and a bookkeeper. If you plan to take on all of these roles on your own at the beginning, you'll need to be extra careful. Even one mistake on your part can land you in legal hot water.
What are the ongoing expenses for a micro-lending company?
Overhead for a micro-lender is low, as you generally don’t need an office to conduct business:
- Employee salaries
- Advertising costs
- General office supplies
- Website costs
Who is the target market?
If you're hoping to make a social contribution as much as an economic one, an ideal person to lend a small sum of money to maybe a woman in a third-world country, for example. She may be smart and capable of running a small family farm, but she lacks the resources to get started. A small sum of money may buy her enough for a few animals, which she can then raise to provide for her family. She may use the milk from goats or eggs from chickens to both nourish her family and sell to others in her community.
If you're hoping to make money on your loan, you may want to consider lending to young go-getters who lack the credit history they need to get a conventional loan. There are a number of reasons why people may need a small amount of money, so do your research first before you decide which areas need your assistance the most.
How does a micro-lending company make money?
Micro-lenders make money by charging people interest on their loans. You may lend out $500 at a 20% interest rate, meaning the debtor will owe $600 by the time all is said and done.
How much can you charge customers?
Interest rates vary widely from place to place. Some may charge 10% while others charge up to 80%. The average is about 35%, but you’ll want to do research on the interest rates in any given area. Some well-known, non-profit micro-lending websites don't even offer the option of interest, while others may go as low as 3%. In these cases, it's more like charity than a business venture though. Those who charge extremely high-interest rates are usually for-profit businesses.
How much profit can a micro-lending company make?
With persistence and patience, a micro-lender can make a considerable amount of money when in the right area. Some studies state that up to 97% of low-income borrowers pay back their loans under the agreed-upon terms. If you make $100 on average on each loan, you’ll need to make 600 loans in a year to make $60,000.
How can you make your business more profitable?
You may wish to expand to other parts of the world to make your business more profitable. Or you could consider opening up a payday loan store in your neighborhood if you feel you have a good handle on micro-lending and want to serve others who may need financial assistance.
What will you name your business?
Choosing the right name is important and challenging. If you operate a sole proprietorship, you might want to operate under a business name other than your own name.
When registering a business name, we recommend researching your business name by checking:
- Your state's business records
- Federal and state trademark records
- Social media platforms
- Web domain availability.
Read the full guide for steps 2-9.
We would appreciate it if you would share this Rules of Thumb blog post on your social media page so that your peers who might be considering starting a micro-lending business can benefit from the information.