Micro lending companies are organizations that offer small loans, usually to people that can’t get it from elsewhere. These might be people that need a bit of money to start a business or they could be individuals that are in financial trouble and do not have many borrowing options. Unlike other financial institutions, micro lending companies don’t usually ask for a credit check before lending someone money, but they do tend to charge a higher interest rate.
If you are looking for a new business venture, starting your own micro lending company could be very lucrative. However, there are a lot of potential issues when you start a company of this nature, so you need to take steps to manage the risks. Here’s how you can start your own micro lending company.
Decide On Your Target Market
People often forget this step because they assume that the target market for a micro lending company is anybody that needs to borrow money. However, you need to consider the level of risk you are willing to take on as well as your ethical standpoint. For example, you could offer loans to people with bad credit and charge a higher interest rate to maximize potential earnings. However, there is a higher risk of people defaulting on their loans because they have had financial issues in the past. Some people decide that they want their business to support local businesses or charity endeavors instead, so they focus on those areas. When you are putting together your business plan, make sure that you research your target market so you have a clear idea of the kinds of people you are trying to reach with your business.
Track Finances Carefully
Tracking your finances is important in any business, but when you run a loan company, you need to keep an extra close eye on things. With money going out and coming in all of the time, it’s easy to lose track of how much you actually have. Loan companies use exception and tickler tracking systems to keep track of each loan and provide reports on the financial health of the business (you can learn more here), and you need to invest in these kinds of systems. Without a firm grasp on your finances, you can soon run into trouble if a few people default on their payments and you suddenly realize that your cash reserves are drying up.
Source Adequate Funding
As you’d expect, you’re going to need a good amount of funding before you get your business off the ground. It is possible to start a micro lending company with a small amount of cash and only lend to a few people. When you start bringing profits in, you can gradually expand, but this is a long process. It also means that you may be forced to turn potential customers away because you simply don’t have the cash to lend them. That adds up to a lot of missed opportunities, so it’s best to work on raising more cash before you start looking for your first customers.
Starting a micro lending company is not without its risks, but there is a lot of potential reward as long as you follow these tips.
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