Starting a Payday Loan Business

As the economy falls deeper into a recession, the need for helping people make ends meet is growing ever larger. Prices are climbing, jobs are being cut, wages are falling. People are finding it increasingly difficult to get through the month with the cash that comes in. This situation presents a tremendous opportunity for risk-taking entrepreneurs who can see past the difficulties to the enormous profit potential in front of them. This business is fraught with risks -- changing legal requirements and an increase in defaults -- yet it can be quite lucrative.

The assets needed to start a payday loan type of business are varied. Money, of course, is obvious. You have to have cash available to be able to lend out. A good location, as well, is important. You have to near your potential clientele, in an area where there aren't any competitors. You need general business skills, including planning and attention to detail. You also need compassion tempered with an ability to say "No".

What do I mean by that? Nearly everyone who will come to apply for a loan from you will have a hard-luck story to tell. A recent layoff, a family illness, an unexpected car repair -- these are the stories you will hear. They are the stories that will drive most of your potential business to you. If not for their hard-luck, they probably wouldn't need to ask for a loan from your company. You need to show compassion to these people, because they will need to know that they have a sympathetic ear almost as much as they will need money. But being too compassionate can also lead you into financial difficulty.

While the vast majority of loan applicants may be honest people and their need genuine, there will be some who will try and cheat you out of your money. They'll tell a sad tale, hoping that you'll be affected by their tales of woe and that you'll lend them money, only to discover that they never had any intention of repaying and that they've skipped. You'll have to learn how to determine which people are telling the truth, and which people are out to take your money.

If you want to stand out from the rest of the payday loan types of companies, you should do more than just lend out money. You should make a point of helping people create budgets that will help them get their finances in order. For those who are recently unemployed, or about to become unemployed, you should daily get a list of available local jobs for semi-skilled and unskilled workers. By helping your borrowers get back on their feet, you will help ensure that they will repay their loans on time without problems.

The risks are higher than most loan companies. The people using the services of a payday loan type of business have more than likely been turned down for loans from conventional lenders like banks and credit unions. Or they are overextended with their existing loans. While nearly all of your borrowers will want to repay in a timely manner, some may not be able to. You have to factor in the money lost on these defaulted loans to make sure that you won't go out of business yourself.

The potential profits are high too. Most of the profit in a payday loan operation comes from the application or administration fee. Some payday loan companies charge a $49.95 fee which gets added to the loan. This fee will end up being the bulk of your profit and your loss contingency. The interest rate itself is normally dictated by local usury laws and will be affected by your local competition. In some jurisdictions, the maximum allowable annual interest rate is 60%, or about 1% per week. In others, it's as low as 35% per year, or about 0.7% per week.

However, the winds of change are blowing through the payday loan industry. Many authorities are alarmed at the costs of borrowing for payday loan clients. If a client is borrowing $600 for two weeks, the cost of borrowing that money works out to be about $62 (including the application fee). If you extend that over a year, that works out to be an annual interest rate of over 250%! Some new laws (pending or enacted) will limit the amount of money a payday loan company can earn on any loan they process. Some laws may force loan companies to waive the application fee for trustworthy repeat clients. Other laws may force loan companies to "rollover" the loans into longer terms without any penalty or fee. Be very aware what the laws are in your area, and what the new laws (if any) will require of you! Changes will reduce the profitability of the enterprise and may increase the risks of defaults.

To sum up: find out what is required to open your business. Make sure that you have more than enough money to be able to lend out to people. Make sure you have an extra amount of money to act as a "cushion" to cover cases of default and outright fraud. Learn the ins and outs of personal finance including family budgeting. The best way to ensure that a lender won't default is to teach him or her how to get out of their financial mess. Learn all you can about the industry -- expected loss rates, scams, pending legal restrictions etc. Find a good lawyer. Have him write up the loan contract that you'll be using with your clients. Find out what kind of checks you need to do to determine if the applicant is trustworthy. Develop a system on how to verify the client's claims and assertions. You need to know how to protect yourself before you open your doors. Find a good location, close to your clientele but far enough away from competitors. Ask the police about security systems that you should use to protect you, your employees, your clients and your money from criminals intent on robbing you. Sit down and try and think of all the potential questions that you need to have answered. When done, think of some more. Lastly, once you've got your information, write up a business plan that makes sense, and follow it. The more information you have and the more extensive and thought-out your plan is, the more likely you will succeed.

One last word -- always keep in mind that many of the people who will come to apply for a loan are in desperate need. Provide non-financial help whenever you can. Be kind and considerate at all times. But always always be careful.

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