How To Set-Up A Loans Company

Author · Modified on 5 May, 2022

If you are thinking about setting-up your own payday loans company, you will need to choose a niche, finance your business, legally register it and obtain the correct licenses.

Following the following five steps can help you to establish a successful business which runs smoothly and abides by all relevant guidelines.

Key Points:


  • There are around 23,000 payday loans providers operating in the US.
  • Around 12 million Americans borrow loans each year.
  • To set up a loans company, you need to create a business plan and pay attention to your niche.
  • You need to finalize your means of financing, such as through the SBA.
  • Familiarize yourself with federal and state regulations. For instance, if you’re planning on operating in California, you cannot offer loans of more than $300 to borrowers.
  • Think about what eligibility criteria you will have.


A business plan should clearly explain the idea behind your company.


1. Create A Business Plan


Many lenders will require a strong business plan if you want a business loan, especially if you’re trying to get a loan backed by the Small Business Administration.

A business plan should clearly explain the idea behind your company.

Your plan should also include whom you expect your client base to be, current and projected financials and a detailed explanation of how the business will have enough cash flow to cover ongoing business expenses and new loan payments.

When thinking about your niche – are you offering small loans, large loans, good credit or bad credit loans, installment loans, secured or unsecured. You might need to look at your market size, such as who is looking for loans with bad credit. Is there an area which is underserved or in need of help? Or which offers the best margins?


2. Research Your Financing Options


It’s likely you’ll need a loan to get your new business started.

One option is a small business loan. The Small Business Administration (SBA) works with approved lending partners to help small businesses obtain startup capital. The SBA doesn’t provide loans, it guarantees them.

If a loan is given an SBA guarantee, lenders know the SBA believes in the soundness of the business and its ability to repay the loan.

If you default on an SBA loan, the SBA is responsible for paying back a certain percentage. Depending on the total loan amount, the SBA can guarantee 75 to 85 percent of a loan.

Because the application process can be tedious and time-consuming, many small companies fail to take advantage of getting backing from the SBA, but it is definitely worth the time and effort.


3. Follow The Regulations


State Regulations


A payday loan business comes with a decent share of regulations and legal requirements. Be sure you understand what these are before getting started. In fact, each state has its own regulations for payday loans.

For example, in California, payday lenders can only offer a maximum of $300 loans, until it becomes an installment product; in Delaware, a lender can provide a loan up to $1,000.


Federal Regulations


According to the Federal Truth in Lending Act, lenders must disclose the total cost of the loan to their borrowers.

Payday lenders are required to tell borrowers the amount of the finance charge and the annual percentage rate in writing before a customer signs for the loan.


Be Aware Of (And Stay Up To Date With!) New Rules And Regulations


From July 2019, the Consumer Financial Protection Bureau decreed that lenders are required to assess whether or not a borrower will be able to repay the loan while still meeting basic living expenses and other financial obligations.

The rules also limit the number of loans one borrower can make in quick succession to three. If you plan to start a payday loan business, make sure to stay abreast of rules that govern the industry.


4. Consider Hiring A Lawyer


An experienced lawyer can help you draft a loan agreement for use in your new business. Because this type of business comes with so many regulations and legal requirements, you’ll want to get started on the right legal and ethical foot.

The loan agreement should spell out the terms and conditions of the loan as well as the interest rates, date of maturity for repayment and the follow-up action in case of default.


If you plan to start a payday loan business, make sure to stay abreast of rules that govern the industry.


5. Think About How You Will Determine Borrower Eligibility


Decide how you will determine who is eligible for a loan. What will you require? Most payday loan companies require a recent pay slip from the borrower as well as a copy of last year’s tax return.

It’s also smart to make a copy of the borrower’s photo I.D. and Social Security card, and to have procedures in place to keep this information safe.

You can go over these details with the lawyer as well, to make sure you’ve got all of your legal ducks in a row.

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