Microlending is a type of business that lends small amounts of money, particularly to individuals who cannot obtain large amounts of loans from big institutions. Often, microlenders do not ask for collateral before lending money. However, these institutions can charge high-interest rates to lessen the gravity of risks if the borrower runs away from their responsibility.
Microlending businesses have made their way to different nations, and some of them pursue non-profit ventures. They lend people who need it for their small businesses. Aspiring entrepreneurs can also get cash from lenders to start their dreams. Sometimes, this is the lender’s way to give back to the community and help people lead better lives.
The Basic Steps
There are ten steps in building your lending business. Here’s the step by step-by-step procedure:
- Create a business plan
- Make your micro-lending company a legal business
- Register your company for legal taxes
- Open a credit card or bank account for your business
- Set up your accounting department
- Secure all the required permits and licenses
- Get a company insurance
- Define your company brand
- Create a website for your business
- Set up your communications system
Now that you have decided the kind of business you want to run, it’s time to take the necessary steps. A business is more than just registering your company with the state. Proper planning is fundamental to your success. It will help you determine all the critical elements of managing a business and teach you lessons through experiences.
Lucky for you, we have compiled the common questions asked by lending companies. Listed below are the common questions of new lending business owners and some guides so you can plan out your business properly.
How much does it cost?
A micro-lending company doesn’t typically need a lot of workforce. However, you need to hire a collector, a loan processor, and a bookkeeper. Many new entrepreneurs think that they can perform these tasks on their own. While it may be easy at first, you will start to have a hard time when you obtain more borrowers. So, make sure that you can do these tasks without help. Otherwise, you might end up in legal hot water.
What are the common expenses of a microlending company?
As mentioned, you don’t need a lot of employees. But that doesn’t mean that you can save a lot of money. In most cases, microlenders need to pay for the following to conduct the business properly:
- Staff payroll
- Service fees for loan payment processing
- Marketing costs
- Advertising expenses
- Website fees
- General office supplies
Who is your target market?
Your target market will vary on the mission of your microlending business. For example, if you built your business to contribute to society’s economy, one of your target borrowers could be an eager single mom who wants to start a business. She may be poor in financial resources, but she is intelligent and capable of growing the money. If you lend her money, you know that she will use it to create passive income for her family. Thus, helping her contribute to the economic growth of her community.
However, if your purpose is to make more money by lending to people, you may want to consider a go-getter target market. These people usually don’t have enough credit limits to get a loan. Borrowers have different reasons for loaning money, so it’s essential to understand the individuals that need your financial assistance the most.
How will you make money?
This is probably one of the most important questions. How exactly will you earn money in the microlending business? In general, lenders make money by adding interest on top of the loan amount. For example, if a lender lends out money at a 25% rate, the borrower needs to return the amount he borrowed plus 25% of it.
How much is the interest rate?
Microlenders have different rates, and they would most likely vary. Some businesses charge 10%, while others charge their borrowers up to 70%. The average interest rate would be 35%, but you’ll have to do your research as it could depend on your business area. Some non-profit micro-lending businesses can offer low-interest rates that do not go beyond 5%. In cases like these, the lender aims to act as a charity and help people build their lives. Microlenders with high-interest rates are usually after more significant profits.
How can you make your microlending business profitable?
Like other businesses, your marketing strategies play a vital role in making your business profitable. Overall, making your business more profitable will depend on the lengths you’re willing to take. You can open an office where people can come in person to ask for a loan or build your brand digitally so more borrowers can see your business.
So there you have it. Hopefully, these tips will help you set up your microlending business successfully. The business itself is risky, but remember that all businesses come with their own risks and disadvantages. Find some time to learn more about the industry and how you can earn more by lending money.