Advisory Column: How to start a same day loan business
QUESTION: I am thinking about opening a business which would give same day loans. I am not registered as yet, but need proper guidelines to do so. I would appreciate your input and advice on how to go forward and what is needed and expected of me and the borrowers.
FINANCIAL ADVISOR: This type of business is not regulated now, but I expect it to be soon. It is important, therefore, that you establish a formal business by registering it at the Companies Office of Jamaica and operate in compliance with the Money Lending Act.
Select a reliable and reputable group of persons to serve as its board of directors. If you can find persons with expertise in the credit business and with the ability to give time and add value to your business, invite them to serve as directors.
You will need adequate financial resources to meet the daily expenses of running your business and to lend to your customers so that the business can make money. In other words, your business should be adequately capitalised. Determine if you have sufficient money to establish your business or if you will need to bring other persons into it as owners, or even if you will need to borrow.
Understand from now that businesses do not make money overnight and that it is prudent to re-invest profits to build its financial strength. Treat yourself as an employee; pay yourself a fixed salary and resist the temptation to draw funds from your business to meet your living expenses.
The Money Lending Act requires that businesses such as the kind you want to set up lend at a maximum rate of 40 per cent per annum, but many informal operators pay no attention to this requirement sometimes charging way above that rate. Where the rate is to be exceeded, it is required by law that an application be made to the Ministry of Finance for an exemption.
Bear in mind that there are other businesses in the market. Pay attention to the rates they charge, the services they offer, their products and the segment of the market they cater to. In fairness to the borrower, be open about the basis on which you determine interest - add-on or reducing balance - and also state the annual percentage rate so that the consumer can better understand the real cost of the loan and be in a better position to compare rates.
Make sure that you use a contract that spells out very clearly the terms and conditions of each transaction. Once signed, the contract binds both parties. Seek legal assistance to draft the contract if necessary.
To be fair to the consumer, avoid loosely adding processing fees and other charges which increase the cost to the unsuspecting borrower although you may recognise that lending rates are as high as they are due to the risk to which the lender is exposed.
To protect yourself and your business, whether you give secured or unsecured loans, it is important to have a good, tight contract, which a competent attorney-at-law can draft for you. In much the same way that you expect your customers to honour their contracts, let your word be your bond as well. For instance, if you are operating a same day loan business, be sure to disburse funds within twenty-four hours of the submission of the application.
Additionally, manage the quality of your customer; select employees of reputable organisations with a stable employment history and a minimum period of employment such as six months. The practice of requiring that prospective borrowers provide a valid government-issued identification, proof of address, their TRN, three recent pay slips, a job letter, a statement of account from the bank and personal references is useful in building a client base of reputable persons.
For additional protection, set upper and lower loan limits and only settle for good quality guarantors and collateral but you should be helpful to your customers by letting them know where, when and how payments are to be made.
If your business is to succeed, you need to invest time in planning what you want to do and how you will do so. Seek professional help if necessary and be prepared to be patient and to manage any setbacks on the way. With perseverance you can succeed.
n Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel. email@example.com