How to Start a Personal Loan Business

A personal loan business can be a rather profitable enterprise. Instead of selling a product or service, you’d be providing something nearly everybody wants: access to money. However, getting a personal loan business off the ground requires some work. There are several steps you’ll need to take, such as forming a business entity, getting the necessary licenses and permits, and setting up an accounting system.

Key Takeaways

• Starting a personal loan business requires making a business plan, forming a legal entity, and securing licenses, an accounting system, and business insurance—among other steps.
• You can fund a personal loan business yourself or with the help of investors, or you can set up a peer-to-peer (P2P) lending platform.
• While a personal loan business can have expensive upfront costs and risks, it also enjoys a large market and high potential returns.

7 Steps to Starting a Personal Loan Business

1. Research the Market 

Before setting up shop, research the lending market for your target area or demographic. Understanding the current supply and demand can help you make better business decisions.

From there, analyze competitors and their interest rates, loan terms, and customer bases. The more you know what you’re up against, the easier it’ll be to strategize.

2. Put Together a Business Plan

Next, create a business plan that outlines how you’ll structure, fund, and market your personal loan business. Here are some sections you may want to include.

• Executive summary: This is a high-level summary of what your business will do and how it will operate and grow. It may also include a mission statement with your company’s values and goals.
• Products and services: Describe what types of personal loans your business will offer, such as secured or unsecured loans, installment loans, lines of credit, etc. Then outline what the customer journey will look like from initial contact to loan payoff. 
• Market analysis: Explain the current state of the industry and how you plan to capture market share from competitors. This is a good opportunity to summarize your findings from your market research.
• Marketing strategy: Lay out your plan to attract and retain customers, including the marketing and advertising channels you intend to use.
• Financial projections: Estimate your personal loan company’s finances in its first few years. This includes your expectations for revenue, operating costs, cash flow, and profit.

3. Decide Your Business’ Structure

Unless you opt to remain a sole proprietorship, you’ll need to create a legal entity to house your new business. This could be a limited liability company (LLC), partnership, or corporation, each of which changes how your business is taxed and your level of personal liability. Consult a legal or tax professional for guidance on which structure best suits your needs.

4. Register With the IRS

Depending on the type of business entity you form, you may need to get an employer identification number (EIN). This is a unique identifier assigned to your business by the Internal Revenue Service (IRS) for tax purposes.

5. Secure Necessary Licenses and Permits

Depending on where your business is located, there may be specific licenses or permits you’ll have to get. Visit the Nationwide Multistate Licensing System & Registry (NMLS) website to determine what you’ll need and start the relevant licensing and permitting processes. 

6. Purchase Accounting Software

As a personal lender, you’ll have to keep track of loans, payments, interest, expenses, wages, and other cash flows. Invest in robust accounting software to do this for you, and consider hiring a dedicated accountant to ensure your business stays compliant.

7. Purchase Business Insurance

Your personal loan business could get sued, suffer a cyber attack, or be liable for a worker’s injury. To protect against these and other risks, get business insurance.

The federal government already requires businesses with employees to have worker’s compensation, unemployment, and disability insurance. However, you may also want to invest in additional coverage, such as general liability, product liability, or professional liability.

How to Fund a Personal Loan Business

Now that you know the necessary steps for starting a personal loan business, let’s discuss one of the biggest hurdles: funding. After all, you need to have money before you can lend it to borrowers. 

Below are some common funding options:

• Your money: If you can bootstrap your personal loan business with your own money, you can keep full control over your profits, lending terms, and other business decisions (within regulatory limits). 
• Money from investors: A strong business plan may attract investors who will contribute capital in exchange for ownership stakes in the company. You’ll need to share the profits (and possibly decision-making authority) with them. However, you’ll have lower upfront costs and less risk.
• Peer-to-peer (P2P) lending: Instead of lending your or investors’ money, create a peer-to-peer (P2P) lending platform that connects borrowers with private lenders. Meanwhile, you get a share of the profits in exchange for your service.

Important

The biggest risk with a personal loan business is that some borrowers may not repay their debts. That’s why it’s crucial to set standards like a minimum credit score and then thoroughly vet borrowers by checking their credit, income, and existing debts.

Pros and Cons of a Personal Loan Business

Pros

• High profit potential

• Flexible business model

• Widespread demand

Cons

• Complex regulations

• High upfront costs

• Danger of borrowers failing to repay

Pros Explained

• High profit potential: You could, if you so choose, charge high interest and origination fees for an immediate and ongoing cash flow.
• Flexible business model: Thanks to digital transactions, you can run a personal loan business from virtually anywhere.
• Widespread demand: Plenty of people want the funding that personal loans can provide, resulting in a sizable market for your lending business.

Cons Explained

• Complex regulations: Financial and consumer protection laws can be strict and difficult to navigate.
• High upfront costs: Unless you raise substantial investor capital or opt for a P2P lending model, you’ll likely need a lot of money to start a personal loan business. 
• Danger of borrowers failing to repay: With every loan, you risk losing some or all of the money if the borrower misses payments or defaults.

Other Tips for Starting a Personal Loan Business

Before you launch your personal loan business, here are some final tips for success:

• Be prepared to work: Starting a personal loan business takes serious effort. Get ready for long hours and challenging business problems.
• Ensure you have sufficient capital: When you’re in the lending business, you need a lot of money—not just to lend out but also to keep in reserves.
• Protect sensitive data: As a lender, you’ll handle borrowers’ bank account numbers, Social Security numbers (SSNs), and other private information. Invest in data security professionals and software to ensure these are kept safe and secure.
• Set up a way to collect payments: That might be through a proprietary online portal, a third-party service, mail-in payments, or some other arrangement.
• Establish how you’ll collect on delinquent loans: Some borrowers will likely fall behind on payments. Put a process in place for collecting these delinquent loans.
• Understand local regulations: Lending is a highly regulated industry due to the large amounts of money and risk involved. Ensure you stay compliant to avoid legal issues.

The Bottom Line

A personal loan business can be a great way to make a high return on your money. However, you must ensure the business is set up correctly—with the right structure, licenses, funding, and borrower criteria.