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As noted by the Penny Hoarder, about 12 million Americans turn to payday loans each year for short term financial help. For some people, these types of loans are the only option when times are tough. Due to their demand, high-interest rates, and finance charges, payday lending can be a lucrative small business to large business for entrepreneurs (especially when an affiliate program is joined).
In order to have a successful payday loan business, you need to get a good understanding of how the industry works, create a business plan, and more. Read on for an overview on how to get started in this space.
Here’s How to Become a Payday Lender
Creating Your Business Plan
Before you invest a penny in your business, setting up a business plan is a must to help you identify your goals and how you will achieve them. Your plan should include:
- An Executive Summary – a one to four page summary that illustrates the key points in your business plan.
- Business Overview – to include your type of business, location, means of doing business, etc.
- Operations Plan – how your business will function including physical setup. Having a disaster plan is also a plus.
- Market Analysis – an examination of the market as a whole with a well-researched and defined target market.
- Products and Services – in addition to payday loans, will you offer any other products or services such as title loans?
- Sales and Marketing – how you will get the word out to your targets. Examples include: print advertising, search engine optimization, social media marketing.
- Competitive Analysis – a look at the strengths and weaknesses of your direct and indirect competitors.
- Management Team – if you won’t be the sole owner and operator of your business, list out and define the roles for each decision-maker.
- Financial Plan – the amount of money you need to get your business off the ground and make it successful.
- Projections – what your projected income will be up to the next three years.
Opening a Store
Next, you want to determine what kind of store you will open: either a physical storefront or online business. If you plan to open a physical storefront, be sure to do extensive research prior to committing to a location. Since your customers will typically be those who earn a lower income, seek out space in a low-income neighborhood. If you choose to go with an online store (or both) you’ll need to determine the best online store platform for your needs. Both types of stores will require marketing with search engine optimization to help your store get found.
Since you’ll be lending to customers, you will need cash. While you may be able to fund your website build and storefront rent expenses on a credit card, you won’t be able to lend to your customers with credit. Your best options for funding your payday loan business are to get investors or a small business loan. Loan applications can take time to get approved, so be sure to plan accordingly.
Building Your Customer Base
If leads don’t walk through your door assuming you open a physical storefront, buying payday loan leads online can help and should always be a resource to consider. With payday loan leads, you can bring in quality customers. Being part of a payday loan affiliate program also helps increase your chances of earning even more money. Get started by talking to a specialist about a bidding system so you can decide for yourself what a lead is worth.
Understanding and Following Regulations
The state regulations and federal regulations in the payday lending space can be complex and ever-changing. Having a lawyer who specializes in the industry is recommended. If a lawyer is not an option, the website paydayloaninfo.org is a great resource to check in with. As a payday lender, it’s your responsibility to follow the regulations. For example, according to the PayDay Loan Consumer Information site:
- In Arkansas, the state constitution caps loan rates at 17 percent annual interest.
- New Hampshire capped payday loan rates at 36 percent annual interest in 2009.
- Maine caps interest at 30 percent but permits tiered fees that result in up to 261 percent annual rates for a two-week $250 loan.
In addition, according to the Bureau of Consumer Financial Protection, the Payday Lending Rule requires lenders to view borrowers’ pay stubs, check with employers, or otherwise confirm borrowers’ ability to pay back their loans.
Determining Eligibility and Terms
When determining the eligibility of your customers, be sure to keep the rules and regulations of the industry in mind and have a clear focus of these points.
- Who will be eligible for your loans?
- Which documents will be required such as: a recent paystub, copy of a recent tax return, photo ID, and a copy of the borrowers’ social security card?
- Loan amounts.
- Interest rates.
By following these tips, within no time, you can be a payday lender.