Starting a payday loan business
Personal Financial Advisor, OranHall
I am about to open a payday loan business and I am asking for your advice and suggestions. I would be very happy to hear from you.
FINANCIAL ADVISER: There is no full-fledged regulation of the payday loan business. Commercial banks and credit unions which grant such loans are regulated by the Bank of Jamaica, but there are many other players in the payday loan business and they are not regulated.
You seem to be interested in setting up an informal payday loan business, but you should note that such businesses will soon be regulated.
My first suggestion is that you register your business at the Companies Office of Jamaica and treat it as a serious enterprise. 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.
Ensure that your business is adequately capitalised. You will need financial resources to meet the daily expenses of running your business and, importantly, to lend to your customers so that the business can make money.
Businesses take time to make money and it is easier to make them strong if profits are reinvested. Pay yourself a salary rather than withdraw money to meet your expenses. Remember that you are running a business.
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.
You will find, though, that rates are market-driven, so you must be aware of the rates charged by your competitors - and there are many. You may use the add-on or reducing balance method to determine how interest is determined. In fairness to the borrower, it makes sense to also state the annual percentage rate.
This will help the consumer to better understand the real cost of the loan and to 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.
Be fair to the consumer. Avoid loosely adding processing fees and other charges which increase the cost to the unsuspecting borrower. Bear in mind that lending rates are as high as they are due to the risk to which the lender is exposed.
But you must protect your own interest. Some lenders give unsecured loans; others do not. A good, tight contract is one way to protect yourself and your business.
Additionally, limit your business to employees of reputable organisations and to individuals who have worked with their current employer for a minimum period of six months, for example. Set upper and lower loan limits. Pay attention to the quality of the guarantor and the collateral.
Pay attention to the quality of your customer. Some lenders do this by requiring that prospective customers provide the following: 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. It is up to you to decide how far you will go in confirming who your client is.
It is one thing to get customers. It is quite another to keep them and to get referrals from them to grow your business. Keep your part of the contract and give service above the customer's expectations.
Charge reasonable rates and focus on the long-term viability of your business. If you get things right now, it will be much easier for you when the business is regulated.
Oran A. Hall, principal author of 'The Handbook of Personal Financial Planning', offers free personal financial planning advice and email@example.com