How To Start A Lending Business Online

Running an online lending business is one of the most lucrative businesses in the modern-day. Everyone gets a financial emergency at some point in life. Is there a …

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Running an online lending business is one of the most lucrative businesses in the modern-day. Everyone gets a financial emergency at some point in life. Is there a better way to get financial assistance than lending on the internet?

There are a few basics you need to understand before investing in the online lending space. This guide seeks to elaborate and explain the basics to minimize risks and realize profits.

  1. Select your Business Model

In the online lending space, there are two particular business models. Some focus on consumer lending, and others specialize in commercial lending:

  • Consumer Lending- These loans are given to individuals, either on secured or unsecured terms. They are smaller as they are usually $500 or less. They are paid off in two to four weeks. Interest rates go up to 400%. The most common types of consumer loans are credit cards, auto loans, mortgages, student loans, personal loans, and refines. 
  • Commercial Lending- These are short-term loans that are taken by businesses. They are usually payable between 30 days and 18 months. Amounts are from $1,000 going up, and interest rates range from 13% to 71%. Also, they can be unsecured or secured by collateral. Most businesses seek commercial loans to cater to capital, machinery, equipment, and operation costs.

Most entrepreneurs opt for consumer loans as they are paid off in shorter periods and are more profitable. This is because their interest rates are higher. They also have a lower risk because they involve smaller amounts.

However, commercial loans have lower default rates meaning lower risk, though they have lower profit margins. It is eventually up to you to decide which model is best suited for your business.

  1. Understand and Heed Federal and State Laws

You have to understand and follow different state and federal legislation in any form of business. Learning relevant laws will help you avoid legal issues and avoid criminal liability.

Being an online loan provider, you offer digital finance solutions by just a click of the mouse. However, you have to follow government laws that regulate how you offer your services. These laws vary from state to state.

Here is a general outlook of some legal concerns for your online lending business;

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  • Some states have allowed online laws, but have banned storefront payday loans
  • Some states cap interest rates
  • Some states ban payday loans altogether
  1. Plan Your Business

Once you have identified and understood the loans you should follow, you should now sit down and write a comprehensive business plan. Without a plan, it will be impossible to see growth because you lack a clear vision of your goals.

You should devote ample time to drafting and writing your ideas and how you will make them work. Your business plan will be a blueprint of your business, how you will operate, how you will grow, the projected time frame, and who is involved.  

A comprehensive business plan should include the following components:

  • Executive Summary- description of the nature of the business, mission statement, and general company information. Include your background experience because you are starting out, and how it will help in the success of your business.
  • Business Description- Describe your target market, interest rates, lending strategy, and operational costs.
  • Market Research and Analysis- How will you market your services? Also include how you intend to build your brand, projected revenues, potential challenges, and growth opportunities.
  • Product Line- Describe the loans you intend to offer. Also, who are your competitors, and how will you stand out from them?
  • Team Description- Include the bios of yourself, the people you intend to work with, and the roles they will play.
  • Marketing and Sales- Describe your marketing plans, how you intend to grow your business, obtain profit, and future expansion.
  • Financial Projections- includes a detailed report of financial reports for the first three or five years in business.
  1. Look for Investors or Settle Funds

Any business needs finances to operate. When it’s time to put your business plan into action, you will need capital and operational funds.

You can use a few methods to raise capital. You can tap into your social network of friends and family, as a more comfortable option. You can also go the hybrid way, where you find lenders and investors who will believe in your objectives and fund your business.

  1. Get Merchant Services

Before you launch your online lending business, you will need to acquire merchant services because you will be accepting payment electronically. You must have some form of card processing prepared.

It can be challenging to get approval for processing by banks because online lenders are classified as “high risk.” However, some specific providers specialize in helping businesses seen as risky.

  1. Launch your Site

To set up your site, you need to hire a professional web developer. You can hire one directly or work with a partner recommended by your domain hosting service. 

Look for someone who specializes in WordPress because it is usually friendly to use even for people who don’t have any technical skills. This will enable you to operate it on your own after it has been set up.

Also, ensure you have advanced encryption and protection measures to protect your borrowers’ financial and personal information.

Key Takeaways

Starting and running an online lending business is an excellent opportunity to make significant profits. Before you start, decide which business model to take and thoughtfully draft a business plan. You should also understand the federal and state laws in the lending industry. Settle your funds by borrowing from your social circle or find investors. Obtain merchant services and find a professional web developer to set up your site.

Author Bio

Edmund Downs has years of experience as a financial advisor. Edmund’s daily routine will include talking to different clients to determine their financial health, advising clients on the best investments they should take, and preparing and interpreting financial records on behalf of his clients.  


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