People go to major lending institutions like banks when they need standard loans. However, when it comes to alternative lending solutions or small loan amounts, banks and bigger financial institutions cannot accommodate the needs of a prospective borrower.
This is where a micro lending business shines.
Before you dream of offering FHA loans, start with small ones. Plus, a micro lending company will benefit two parties: you as you start your business and people who need a trusted provider of small loan amounts or alternative lending solutions.
However, there is more to opening a micro lending business than just registering it with the state. You need a solid business plan to ensure your new business is properly registered and legally compliant. A good plan also ensures your business is ready for emergencies.
Step 1: Plan Your Business
A clear plan is a must for any entrepreneur. The plan serves as a blueprint that maps out the specifics of your micro lending company, as well as discovers potential weak points.
Some topics to consider include the following:
- What are the costs involved in starting a micro lending company?Most micro-lenders do not have plenty of overhead costs. Although, you may need a bookkeeper, a collector and a loan processor. If you want to perform these tasks by yourself, you’ll need to be more mindful. One mistake on your part can result in legal trouble.
- Who is the target market?It starts with the type of contribution you wish to make. Are you more focused on making a social contribution than an economic one? Your potential target market could be people in third-world countries who lack the resources to start their small businesses. But what if you want to make more money on your loans? Target young professionals who need a credit history to qualify for a bigger loan.
- What are the ongoing expenses for micro lending companies?Since the overhead for micro-lenders is pretty low, you don’t need an office to conduct business. However, you do need funds for the following costs:
- General office supplies
- Website expenses
- Advertising costs
- Employee salaries
- What will your business name be?Choosing the right name is an important challenge. If you operate a sole proprietorship, why not operate under a name other than yours? Also, when registering a business name, always research a potential name by checking the following:
- State and federal trademark records
- Your state’s business records
- Web domain availability
- Social media platforms
Step 2: Register for Taxes
You need to register for different federal and state taxes before you can open your micro lending business. To apply for taxes, you’ll need to apply for an employer identification number (EIN).Apart from the EIN, you must also learn about small business taxes.
Depending on the type of business structure you prefer, you may have different options for the taxing of your business. For example, LLC businesses are taxed as S Corporations.
Step 3: Open a Business Credit Card and Bank Account
Dedicated business credit and bank accounts are important for personal asset protection. When you mix your personal and business accounts, you increase the risk of losing your personal assets (e.g. your home, car and other valuables) in case your business is sued. In business law terms, this is “piercing the corporate veil.”
Also, learning how to build your business’s credit can help you expand your financing solutions. This also means higher lines of credit and better interest rates.
Step 4: Set Up Your Business Accounting and Get All of Your Permits
Recording expenses and other sources of income gives you a better insight of your micro lending business’s financial performance. Keeping detailed and accurate accounts also simplifies your yearly tax filing.
Also, don’t forget to obtain all the necessary licenses and permits. Failure to acquire these important requirements can result in hefty fines or legal trouble. For more information about local permits and licenses:
- Check with your county clerk, city or town’s office
- Get assistance from the local associations listed in the US Small Business Associations
Businesses operating in physical locations need a Certificate of Occupancy, too. A CO confirms you’ve met all the zoning laws, building codes and government regulations. If you plan to lease a micro lending office, your landlord should obtain the CO. But if you plan to buy your office location, you must obtain the CO.
A micro lending business is ideal if you want to help more people obtain funding without a conventional loan.