Start a micro lending company by following these 10 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.
Check out our How to Start a Business page.
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 may be 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 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 loan 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 don’t already have a name in mind, visit our How to Name a Business guide or get help brainstorming a name with our Micro Lending Company Name Generator
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.
It's very important to secure your domain name before someone else does.
STEP 2: Form a legal entity
Establishing a legal business entity such as an LLC or corporation protects you from being held personally liable if your micro lending company is sued.
Form Your LLC
Read our Guide to Form Your Own LLC
Recommended: You will need to elect a registered agent for your LLC. LLC formation packages usually include a free year of registered agent services. You can choose to hire a registered agent or act as your own.
STEP 3: Register for taxes
You will need to register for a variety of state and federal taxes before you can open for business.
In order to register for taxes you will need to apply for an EIN. It's really easy and free!
You can acquire your EIN for free through the IRS website, via fax, or by mail. If you would like to learn more about EINs and how they can benefit your LLC, read our article, What is an EIN?.
Small Business Taxes
Depending on which business structure you choose, you might have different options for how your business will be taxed. For example, some LLCs could benefit from being taxed as an S corporation (S corp).
You can learn more about small business taxes in these guides:
There are specific state taxes that might apply to your business. Learn more about state sales tax and franchise taxes in our state sales tax guides.
STEP 4: Open a business bank account & credit card
Using dedicated business banking and credit accounts is essential for personal asset protection.
When your personal and business accounts are mixed, your personal assets (your home, car, and other valuables) are at risk in the event your business is sued. In business law, this is referred to as piercing your corporate veil.
Additionally, learning how to build business credit can help you get credit cards and other financing in your business's name (instead of yours), better interest rates, higher lines of credit, and more.
Open a business bank account
- This separates your personal assets from your company's assets, which is necessary for personal asset protection.
- It also makes accounting and tax filing easier.
Recommended: Read our Best Banks for Small Business review to find the best national bank, credit union, business-loan friendly banks, one with many brick-and-mortar locations, and more.
Open net-30 accounts
When it comes to establishing your business credit, net-30 vendors are considered the way to go. The term "net-30," which is popular among vendors, refers to a business credit arrangement where the company pays the vendor within 30 days of receiving goods or services.
Net-30 credit terms are often used for businesses that need to obtain inventory quickly but do not have the cash on hand.
Besides establishing business relationships with vendors, net-30 credit accounts get reported to the major business credit bureaus (Dun & Bradstreet, Experian Business, and Equifax Business Credit). This is how businesses build business credit so they can qualify for credit cards and other lines of credit.
Recommended: Read our guide on the best net-30 vendors so you can start building business credit now, so you never have to worry about cash flow in the future. Keep in mind that poor cash flow is the #1 reason businesses fail!
Get a business credit card
- This helps you separate personal and business expenses by putting your business' expenses all in one place.
- It also builds your company's credit history, which can be useful to raise money and investment later on.
STEP 5: Set up business accounting
Recording your various expenses and sources of income is critical to understanding the financial performance of your business. Keeping accurate and detailed accounts also greatly simplifies your annual tax filing.
STEP 6: Obtain necessary permits and licenses
Failure to acquire necessary permits and licenses can result in hefty fines, or even cause your business to be shut down.
State & Local Business Licensing Requirements
Certain state permits and licenses may be needed to operate a micro lending business. Learn more about licensing requirements in your state by visiting SBA’s reference to state licenses and permits.
Most businesses are required to collect sales tax on the goods or services they provide. To learn more about how sales tax will affect your business, read our article, Sales Tax for Small Businesses.
For information about local licenses and permits:
- Check with your town, city or county clerk’s office
- Get assistance from one of the local associations listed in US Small Business Associations directory of local business resources.
Certificate of Occupancy
Businesses operating out of a physical location typically require a Certificate of Occupancy (CO). A CO confirms that all building codes, zoning laws and government regulations have been met.
- If you plan to lease a micro lending office location:
- It is generally the landlord’s responsibility to obtain a CO.
- Before leasing, confirm that your landlord has or can obtain a valid CO that is applicable to a microlending business.
- After a major renovation, a new CO often needs to be issued. If your place of business will be renovated before opening, it is recommended to include language in your lease agreement stating that lease payments will not commence until a valid CO is issued.
- If you plan to purchase or build a micro lending office location:
- You will be responsible for obtaining a valid CO from a local government authority.
- Review all building codes and zoning requirements for your business’ location to ensure your microlending business will be in compliance and able to obtain a CO.
STEP 7: Get business insurance
Just as with licenses and permits, your business needs insurance in order to operate safely and lawfully. Business Insurance protects your company’s financial wellbeing in the event of a covered loss.
There are several types of insurance policies created for different types of businesses with different risks. If you’re unsure of the types of risks that your business may face, begin with General Liability Insurance. This is the most common coverage that small businesses need, so it’s a great place to start for your business.
Learn more about General Liability Insurance.
Another notable insurance policy that many businesses need is Workers’ Compensation Insurance. If your business will have employees, it’s a good chance that your state will require you to carry Workers' Compensation Coverage.
STEP 8: Define your brand
Your brand is what your company stands for, as well as how your business is perceived by the public. A strong brand will help your business stand out from competitors.
If you aren't feeling confident about designing your small business logo, then check out our Design Guides for Beginners, we'll give you helpful tips and advice for creating the best unique logo for your business.
How to promote & market a micro lending company
The best way to promote and market your business is to understand the need you’re filling in any given area. For example, if you’re only targeting small family farmers, then you need to determine how they learn about financial opportunities in their area. This may include physical advertising, such as flyers, or online advertising on specific websites. Depending on your goals, it may even include going door to door.
You should also have your own website that describes what you do, and how you do it. Consider having your information in several languages for the best results, and hiring an interpreter for better communication.
How to keep customers coming back
The best way to generate customers is to be as fair a lender as possible. This doesn’t mean letting people get away with constantly missing payments, but it does mean trying to work with your clients whenever possible. Always do what you say you're going to do, and ensure excellent customer service and professional behavior at all times.
Still unsure about what kind of business you want to start? Check out the latest Small Business Trends to help inspire you.
STEP 9: Create your business website
After defining your brand and creating your logo the next step is to create a website for your business.
While creating a website is an essential step, some may fear that it’s out of their reach because they don’t have any website-building experience. While this may have been a reasonable fear back in 2015, web technology has seen huge advancements in the past few years that makes the lives of small business owners much simpler.
Here are the main reasons why you shouldn’t delay building your website:
- All legitimate businesses have websites - full stop. The size or industry of your business does not matter when it comes to getting your business online.
- Social media accounts like Facebook pages or LinkedIn business profiles are not a replacement for a business website that you own.
- Website builder tools like the GoDaddy Website Builder have made creating a basic website extremely simple. You don’t need to hire a web developer or designer to create a website that you can be proud of.
Using our website building guides, the process will be simple and painless and shouldn’t take you any longer than 2-3 hours to complete.
STEP 10: Set up your business phone system
Getting a phone set up for your business is one of the best ways to help keep your personal life and business life separate and private. That’s not the only benefit; it also helps you make your business more automated, gives your business legitimacy, and makes it easier for potential customers to find and contact you.
There are many services available to entrepreneurs who want to set up a business phone system. We’ve reviewed the top companies and rated them based on price, features, and ease of use.
Recommended: Find the best phone system for your business; check out our review of the Best Business Phone Systems 2021.
Start A Micro Lending Company In Your State
Select your state below for an in-depth guide on completing each of these steps in your home state.
Is this Business Right For You?
This business is excellent for those who understand the power of responsible lending. This isn't charity, but it is giving someone else a helping hand when they need it the most. The successful micro-lender will need an excellent balance between helping others and remaining financially solvent.
Want to know if you are cut out to be an entrepreneur?
Take our Entrepreneurship Quiz to find out!
What happens during a typical day at a micro lending company?
Micro-lenders must do a number of things to prepare to lend money:
- Research target client/demographic
- Screen clients
- Create reasonable billing plans for pay back
- Comply with all state/federal laws for financial lending
- Study lending practices in different areas.
What are some skills and experiences that will help you build a successful micro lending company?
Having some type of formal education in how finances work around the world will help, as will an in-depth knowledge of current law for both the country you operate out of and the country of those you’ll be lending to.
What is the growth potential for a micro lending company?
Micro-lending has done well in Latin American countries and third-world nations because there are a limited amount of ways to obtain conventional funding. If you wish to open a for-profit business, you may want to concentrate on these areas as opposed to lending within the US.
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Take the Next Step
Find a business mentor
One of the greatest resources an entrepreneur can have is quality mentorship. As you start planning your business, connect with a free business resource near you to get the help you need.
Having a support network in place to turn to during tough times is a major factor of success for new business owners.
Learn from other business owners
Want to learn more about starting a business from entrepreneurs themselves? Visit Startup Savant’s startup founder series to gain entrepreneurial insights, lessons, and advice from founders themselves.
Resources to Help Women in Business
There are many resources out there specifically for women entrepreneurs. We’ve gathered necessary and useful information to help you succeed both professionally and personally:
If you’re a woman looking for some guidance in entrepreneurship, check out this great new series Women in Business created by the women of our partner Startup Savant.
What are some insider tips for jump starting a micro lending company?
The best thing you can do is learn how to screen your clients, and to create detailed contracts about each loan. You will get a lot of applications from hard-working, responsible people who will do everything possible to use the funds wisely and pay you back. However, you will get a certain amount of people who are out to take your money, or who are asking for the money to achieve an unattainable goal. Consider video chat or in-person meetings as a way of getting to know your clients. Ask them about their business plan, and look to see how much effort went into their model.
You also need to keep meticulous records to ensure you’re never in danger of violating the laws. Start with sketching out a business plan that details how each transaction will work, and how everything will be recorded. Owners also need to have enough capital to start the business. Even with a limited amount of clients at the beginning, all of your loans will add up quickly.
How and when to build a team
Those familiar with the micro-lending business say to hire people right away, because the risks of making a mistake can be high. However, if you’re starting small with just a few clients or you don’t have very much capital, you may be able to get everything started without external help.