How to Start an Online Lending Business in 2022?

Running a money lending business can be highly profitable and acceptably challenging to manage. In this article, we are going to provide you with informative recommendations on how to start an online, offline, or hybrid loan business, and consider things to consider before investing in alternative lending.

Being well-aware of the basics, you can minimize risks and raise higher profits.

Start an online lending business
photo credit: Rawpixel

Selecting a business model

The first thing to decide is whether you want to operate in consumer lending or commercial lending, or would like to launch a P2P investment platform. Each of these options may require quality loan software and has its specifics.

1. Consumer lending

The loans are granted to individuals on a secured or unsecured basis. Consumer lending includes mortgage, auto lending, student loans, personal loans, revolving credit lines, POS lending, and Buy Now Pay Later programs. The latter two are more complicated to launch a startup with, while they require technical and certain financial integration with retailers or service providers. Most often, alternative lenders provide financing for personal needs, car, or real estate purchases.

2. Commercial lending

Launching a commercial lending company means providing business financing, which is either unsecured or secured by collateral. This lending type is usually associated with extensive documentation management, while the loan officers need to manage contracts, collateral, invoices, and other documents to make sure the loan has a high chance to be repaid after the disbursement.

3. P2P lending

Peer-to-peer lending may imply either the consumer or commercial lending depending on the business model. Businesses build marketplaces to help lenders and borrowers help each other indirectly. P2P lending investors provide their capital and receive remuneration, while borrowers get financing from a convenient platform. The liabilities of all three parties are regulated separately.

Within three major areas suitable for online lending business, you can narrow down the business area. For example, you may want to go for offering online term loans, SBA microloans, or personal loans for business. Most loan businesses decide to start from consumer loans, while commercial loans are paid off in longer periods and may appear less profitable. However, consumer lending is usually associated with higher risks.

Business planning session

How a loan company business plan should look like

To start a successful loan company it would be great to gather with a few like-minded investors and create a business plan.

A comprehensive business plan should contain the executive summary of your business, the target markets, strategy, and operational costs. Also, you may want to conduct market research and analysis to understand competitors, get an idea of projected revenues, challenges, and demands. At this point, it would be important to consider if you need lending software for automation and reducing labor costs.

How to choose lending software?

There are many options for aspiring lenders out there, and the key choice is between the custom and out-of-the-box lending software.

Custom software is most often used as bank loan software and has the potential to better adapt to your business needs. It is developed after a careful business analysis of the business

The out-of-the-box or readymade loan management software has a shorter time-to-market, covers up to 90% of the loan lifecycle by automating the operations, and is a lot more affordable. This is especially important for startups that lack financing at the initial stage.

The proper software can help lenders with creating new loan products in a click, receive online applications and process them, collect documents, set up disbursement, and accept payments.

What lending business owners need to consider before launching an online loan company?

  • Leaders need to have a great understanding of federal regulations and state laws and consult attorneys if any doubts arise. This will help at the stage of the business plan as well as on the stage of lending software development.
  • Plan out well the capital and the operational funds by using your own funds or attracting investors.
  • Consider merchant services and integrations for accepting online payments and making online disbursements. An experienced software vendor can help you with that.
  • Launch a website. Sometimes it requires separate development services, but sometimes lending software companies offer a web portal for customer acquisition as a bonus, for example, HES FinTech has this option.

Online lending

The Bottom Line

Starting and owning an online lending company is a highly promising business type in the years after the pandemic, while so many people are used to online services and are willing to receive financing without leaving their homes.

The ROI in the online lending business is high compared to other businesses, so if you have this idea – start working on the business plan today before your competitors use this opportunity.