A loan or lending business is an endeavor that involves lending either huge or small amounts of money with an interest rate. Often time the interest rate is high since lending businesses do face a higher chance of defaulting as compared to normal banks.

A Lending business can be risky because it involves lending money to people who are desperately in need of money, don’t have a bank account, or even people with bad credit histories.

Below, are the procedures that an entrepreneur can go through in order to start a lending business.

1. Write a business plan

Amount of capital required for your lending company

For starters, the average cost to start a lending business is £20,000. This is for entrepreneurs who plan to have their mode of operation online. The cost includes setting up a website or mobile application and advertising costs.

However, to build a scalable business, that caters a larger number of clients and also having the mode of operation as offline(opending a physical location), the cost would go way higher.

What are the expenditures incurred by you lending company?

Lending business just like any other business, at some point you’ll incur expenses. Hence you’ll have to be aware of them.

Regardless of whether you’re trying to mitigate the cost of operation, often time the expenses include:

• Website or mobile app costs
• Office supplies expenditures
• General advertising costs
• Employees salaries

Which customers are you targeting?

If you are hoping to build a lucrative lending business, you may consider targeting young adults who do not have a credit history.

2. Applying for authorization by FCA[Financial Conduct Authority]

The average time taken, to process authorization takes 10 weeks.

Consider procuring an attorney and CPA, if you are neither familiar nor confident with the procedures involved to acquire authorization by FCA. However, below are the steps involved when applying for authorization by the FCA.

Step 1 - Type of permission

There are two types of permissions to be granted in the finance business which are:

• Limited permission – This suits not-for-profit organizations or credit brokers who deal directly with consumer hire agreements.
• Full permission – This deals with regulated organizations

Step 2 - Auditing and business strategy

At this stage, we’re sure that we are opting for Full-Permission Authorization by FCA therefore, we need to consider business objectives such as

• How to comply with the rules and how they’ll affect the business
• Having the staff approved in appropriate approved persons regime.
• How will the regulation affect the capital and expenditure of the business

There are threshold conditions which should be met while applying for authorization. This condition should be met and maintained which include:

• Office headquarter should be location in United Kingdom – This has to be the office where the company’s administration including the director and senior management should be based on.
• Supervision by the FCA without any hindrance from the management or anyone closely tied to the company.
• The company should have sufficient financial and non-financial resources to carry on business activities.
• Competence – The business executive should be capable, fit and able to carry on the business objective and most of all capable of having the business comply with the FCA’s requirements.
• Business model – The business should be operation in such a way that it satisfied the consumers’ needs while complying and abiding by the regulations of the UK’s financial system.

Step 3 - Documentation

All documentation that has to be submitted to the FCA should be compiled, the business must have the documentation available anytime should the FCA requests them.

Some of the documentation that the FCA would ask for include, draft agreements, pre-contract information, and promotional literature.

Also, the FCA would enquire individuals’ information such as National insurance, passport number, residential addresses and employment history. Also, critical individual information from significant events such as criminal history, fraud convictions, solvency, and civil investigations.

Regulatory business plan.

Here is where the critical work lies. This document describes all the details that the FCA needs to know on how the business is conducted hence the FCA can measure the risk and control over the regulatory concerns. This document covers information such as services, outsourcing, fair customer treatment, permissions, and the company’s financial resources.

Generally, this document should convince the FCA that the business identifies all the activities it intends to perform, acknowledgment of regulated and unregulated risk factors, and assurance on how the business will monitor and control the unforeseen risks.

Step 4 - Patching up the application

After finalizing the information gathering and preparing the documentation, the next step is to file the application by registering to FCA’s connect system and create an application. Also, when applying as a business entity there are questions that need to be answered in addition to submitting information such as permission type, regulatory fees, business plans, management and personnel information, business continuity plan and confirmation on compliance procedures. Last but not least, submission on information regarding owners, management and partners of the business.

Step 5 - Declaration and submission

This involves signing the declaration that the submitted information is complete and accurate, then ticking a checkbox to confirm that the permanent and signed copy of the application will be retained for inspection. The application should be submitted and the fee required should be paid.

It takes between two to six months for an application to be allocated, authorization should take about six months after the application is complete, for the sake of incomplete authorization it should take around 12 months.

3. Secure funding for the lending business

Lending business just like any other business, at some point as a you may be forced to grow the business into a scaled-up company. Hence, you’re going to need funding through funding, loans, investors, grants and angels.

Below are some of the convinent ways as a founder you may obtain funding.

• The government’s Start Up Loan scheme
• Finding business grants
• Crowd funding
• Peer-to-peer business loans
• Family and friends
• Angel investors
• Venture capital

4. Where should your lending business operate from?

You can either choose to operate the lending business online or decide to open a physical office.

5. What should differentiate you from other lenders?

Creating a unique business model or differentiating your business from your peers, should give out an advantage in the industry as opposed to being a copycat. This is possible if come up with a solution quite different or new to the customers you are targeting.

Factors that you should consider when starting a lending business, which should distinguish you from other lenders should include:

• Amount of load
• Are you lending to startups?
• What kind of pledged assets are you considering when lending

6. Team

It is not mandatory for a lending business to kick-start with a big team to be successful.

However, there should be people with different skills and specialties to run the business successfully which include:

• Customer service

  Create a customer service representative team that listens, responds promptly, keeps the company’s promises, asks for feedback and resolves the negative critics and most importantly that understands the business they’re into.

• Underwriters

  This is the team that is responsible for analyzing the loans requested by the client and deciding whether the applicant has qualified for the loan or not.

• Loan collection team

  What the loan collection team does, use different sources such as letters, email, or phone calls to reach out to the debtor so they can repay what they owe the company.

This team should be capable of looking into the client’s assets, using specialized computer software, or by hiring private investigators if and only if they can’t reach out to the debtor.

Sources

FCA