The financial arena is a very lucrative place to do business. Knowing how to start a micro lending business can get you involved in that arena without the same level of risk that other loan ventures may bring. You’ll be handing out small loans to businesses and individuals and making profits off of the interest rates that are charged. Micro lending can happen locally, regionally, or even globally if you wish to keep expanding.
Unlike other lending business opportunities, however, there are some steps that must be fulfilled in order for you to begin lending money. If you don’t follow these steps, then you could be forced out of business.
1. Choose the structure for your business.
A micro lending business can be in any standard structure. Sole proprietors, partnerships, and corporations are all appropriate for this type of business. Although it may cost more to start a corporation at first, the benefits of choosing this structure for your new business is clear. Sole proprietors and partnerships are not allowed to use the words “finance” and “lending” in their business names, but corporations are allowed to do so.
2. You must raise a minimum amount of capital.
Anyone wanting to start a micro lending business must be able to raise a minimum amount of capital before they will be allowed to begin lending in specific regions. The most common current minimum amount is $1 million. If you are unable to secure the minimum capital financing, then you will not be allowed to register the business. Even when minimums are not required, you will often be required to register your business with each nation’s version of the Securities and Exchange Commission. If you need to borrow money to reach this level, the US government has a cap of $750k that can be borrowed in the first year.
3. Partner with the local government.
Several cities, including New York City and San Francisco, have started their own micro lending programs. They are already providing small loans to businesses and may be looking for partners to act as an intermediary for their program. In the United States, the Small Business Administration has been given more than $50 million to provide technical assistance and capital to micro lending agencies as well. If you sign up with the SBA, you will qualify to make loans of up to $50k, with the average loan being about $13k.
4. Make sure that you have a set mission in place.
To make profits from micro lending, most agencies in the US would have to charge 15-20% interest on their loans. When considering a $20,000 loan, that can be a lot of money that a small business owner just doesn’t have. Most micro lenders have a set mission to alleviate poverty and improve communities with their products. You’ll need to be aware that many micro lenders already cap their interest rates at 10% or less.
5. Join up with an intermediary.
If you’re finding it difficult to enter into different markets for your loans, then you may wish to consider a partnership with an intermediary. One of the biggest intermediaries in the world today is Kiva. They are one part crowdfunding and one part micro lending. They’ll offer loan products to people throughout the world, with an average loan being around $400. These loans are guaranteed with collateral they receive through crowdfunding and then banks lend the money out. In the partnership, this means you’ll always get some form of a return.
6. Consider setting up some specific requirements for loan recipients.
Because you are the one providing the terms for the loan, you can set up some unique requirements for business to guarantee a return on the loan. Some require a certain percentage of weekly revenues to be set aside for payment of interest and principal. Others mandate participation in group networking sessions with other businesses who have received micro lending assistance. Always check with local laws to see what is allowed and then proceed.
7. Make sure you register your business in the appropriate category.
There are local, regional, and national registration requirements that may need to be met. This includes licensing, insurance, capital guarantees, sales tax collection, and a number of other specific items. Before making your first loan, double-check that you’ve met every requirement.
Knowing how to start a micro lending business may mean navigating through a complex series of regulations and requirements and the end results may not be extremely profitable, but they can do something amazing. Keep these tips in mind and you’ll be able to create a viable business opportunity.