According to Debt.org, the US consumer debt hit a walloping $14.56 trillion after 2020’s fourth quarter. With 12 million Americans taking out payday loans each year and spending over $9 billion on loan fees, it’s clear that payday loan facilities are ever increasing in demand.
A payday loan is a high-interest, short-term loan usually below $1,000 that provides quick cash for those in need, to be drawn from their next paycheck. While many have mixed opinions about these short term loans and their high APRs and fees, the fact still remains that they are life savers to people who desperately need cash or are facing emergencies.
In essence, payday loans work because there is a consistent demand for them and you can thrive in the lending business with sufficient capital and information. Here are five easy steps we’ve outlined to help you start a new payday loan business successfully.
Start With Drafting a Business Plan
Like every other business, starting a payday loan business requires a laid out, solid business structure to ensure you make guided decisions every step of the way. Plus, a plan is very essential if you look to take out a small business loan as startup capital. This is because it assures your lender that your plan is valid and workable, and that the loan management structures you’re putting in place will eventually help you repay the loan at the given time.
Among other things, your business plan should include:
- The basic business idea behind your intended company
- Your executive summary or a picture of your administrative setup
- Your intended client base
- A detailed description of your business’ services or value proposition
- Market analysis and competitors
- Your startup capital, sales strategy, and long-term financial goals
- Your intended method of customer income assessment and loan management
A good business plan should present these pieces of information in detail to give you clarity and help you access professional financial services whenever there’s need for them.
Select a Location
Like most small businesses, a payday loan business doesn’t require much space. What you’d need is a storefront with a counter section where you can carry out business activities. Again, while choosing a good office space, it’s important to survey the income level of your target audience to be sure they’d be a ready-made market with high demand for your loan services.
This explains why the bulk of payday loan businesses are based in low- and middle-income communities, since they have a greater need for payday loans. You can rent a space in such a community where your business can thrive.
The security of your business is another factor to consider when choosing a site for your office. You may have to make plans for your own security details if it’s an area that’s prone to crises and robbery. Bear in mind that you’re running a core financial business and research locations till you get the most suitable.
Get Familiar With State and Federal Laws
As a payday lender, you must follow federal regulations. Then again, there are also state regulations which differ across state borders. For example, borrowers can get payday loans up to $500 in Alabama, while you can access up to $1,000 in Alaska. It’s essential to get familiar with every single one of these state regulations on the federal and state level before you start a payday loan business.
The Federal law also constitutes the Truth in Lending Act, requiring all lenders to publicize their terms and total costs to their borrowers in writing before they sign agreements. Such costs include finance charges, APR (annual percentage rate), penalties, etc. The act is meant to create a transparent lending system that doesn’t keep borrowers oblivious of all their charges.
Additionally, you must note that new laws are being made per time, and it’s essential to stay updated about them as they determine the course of your business. In 2017, the Consumer Financial Protection Bureau (CFPB) set new rules in place for payday loans. The rules require lenders to examine their borrowers properly to be sure they can repay their loans while meeting basic life and financial needs.
According to the rules, borrowers can only take out a maximum of three loans in quick succession and you must have these state and federal regulations at your fingertips to thrive in the lending business.
Hire a Full-Time Lawyer
Starting a payday loan business couldn’t be complete without seeking legal representation. As a money lending business, you may often encounter cases that require the expertise of a lawyer. That’s where your legal representative comes in handy—to help you cover any legal requirements that may arise in your business.
The reason you need a “full-time” lawyer is because they’d always be available when you need them in-house or for other reasons. In addition, having a full-time lawyer on your team is way cheaper than on-demand contracts, which may see you paying exorbitant legal fees.
Lawyers would also help you to explore and understand hidden clauses in your state’s payday loan regulations so you’re not found wanting before the law. Plus, they can assist you in designing the terms and conditions (APR, maturity date, penalties, etc.) for your lending business so they represent you and your customers’ interests adequately.
Create a Website to Market Your Payday Loan Business
The majority of people today visit the internet for anything they need, and many lenders own websites that represent their loan business on the internet and make them visible to potential customers.
The major contributing factor to your visibility would be search engine optimization (SEO), which basically involves adding target keywords to your blog posts and website generally to make your website rank whenever people search those keywords on the internet. Examples of such keywords may include “good payday loans” or “online payday loans.”
You can hire a web designer or create your website yourself if you’re able to. It’s also important to post informative blog posts regularly to help prospective customers learn more about your payday loan service and believe you have sufficient experience and resources to cater to their financial needs.
Using your website for marketing your business doesn’t nullify other marketing strategies. In fact, most successful businesses thrive by using multi-channel marketing, while committing more to the most promising channel(s). So, you can use paid ads, sponsorship, influencer marketing, fliers, and any other marketing channel that works for you to promote and establish your business till you figure out the most effective channels.
Establishing your business payday loans doesn’t have to be a draining experience—all you need is the necessary funds and information. With the easy steps outlined above on how to start a payday loan business, you can rest assured you’re starting off on the right foot. You can also read up more of our educational resources and use our convenient services to access payday loans.
How Do I Start a Payday Loan Business?
Starting a payday loan business shouldn’t be a hassle.
- It begins with creating a realistic business plan, containing your basic business idea, administrative projections, services, strategy, and financial plan for the next four to five years.
- Finding a location for your business follows. Your office site must be an area of high demand, preferably a low or middle-income neighborhood. You must also consider the security of the neighborhood while choosing one or make provisions for your security.
- Review, understand, and memorize your state and federal payday loan laws to avoid making mistakes.
- Hire a full-time lawyer to help you with drafting your terms and conditions and be your go-to person for legal concerns.
- Create a website and advertise your business.
Is Starting a Payday Loan Business a Good Idea?
Absolutely! People are always in need of financing for living costs and other needs, and mainstream financial institutions hardly meet up with the average person’s loan demands. So, with sufficient capital, you can have a successful payday loan business.
How Do I Start a Payday Loan Business Online?
- Draft a workable business plan, including how to assess your borrowers’ ability to repay their loans.
- Choose a secure and suitable location, preferably a location with your client base; namely, small to medium-income earners.
- Get to know the federal and state laws that pertain to your business.
- Hire a full-time lawyer to be a confidant and take care of legal concerns.
- Create your own website to market your business and establish your brand.
- Advertise regularly.
How Do Payday Lenders Make Money?
Payday lenders earn interest on every amount lent out, usually up to 34% ROI. Payday loan APRs usually amount up to 400%. Payday lenders fix default rates for borrowers that fail to pay their debts on time or violate the loan terms and conditions. Then, over 90% of payday loan providers generate their revenues from borrowers who take out five or more loans.
What Are the Costs of Opening a Loan Company?
Here are some estimated payday loan business costs based on our research:
- Permit and license fees: $50–$700
- Patent fee: $5,000–$15,000
- Legal costs: $1,500
- Business insurance: $500–$2,000
- Advertising costs: $100–$500
Do I Need a License to Become a Payday Lender?
Licensing as a quick loan provider highly depends on the laws governing payday lending in your state. You must scan for licensing provisions before setting out to provide payday loans, so apply if necessary.