How to Start a Small Finance Company
A small finance company is one that specializes in making secured loans to consumers and businesses. Typical transactions include home equity loans, vehicle loans and installment loans for the purchase of major household appliances such as refrigerators and washing machines. Finance companies differ from banks in that they do not accept deposits from customers. Some small finance companies are independent and restrict their market area to one local area, while others have a nationwide presence, with branch offices throughout the United States. Each state regulates the finance companies located there.
- Study the market you intend to serve. It may be a city, a county or a larger area. To understand the potential loan demand in your market area, investigate the demographics (i.e., the characteristics of the area’s population, especially age and income) and identify potential business customers.
- Identify your state’s regulator of small finance companies. This government entity may be the same as the regulator of banking in your state. After you make contact, obtain the necessary information about how to qualify as a finance company.
- Hire outside professionals to assist you in founding your finance company. An attorney or a law firm with experience in financial services will guide you through the many laws and regulations you will encounter. A well-qualified certified public accountant or accounting firm is necessary for establishing financial controls, auditing your books and records, and producing financial statements.
- Form your business if you have not already done so. When you fill out the application form, you will have to indicate whether your business is a proprietorship, a limited liability company or a corporation.
- Complete your business plan. This will be necessary in case you plan to obtain funding from outside investors. Potential investors will require a suitable business plan that contains detailed financial projections over the next three to five years. It is customary for finance companies to fund their loan business with lines of credit from banks. Those banks will need to study your business plan as well during their approval process.
- Apply to the regulator for your license to conduct business as a finance company. Consult your business plan for the information you need for filling in the official forms. Be prepared to attach a check for the application fee. For approval to be final, you will have to obtain a surety bond or an irrevocable letter of credit to support your lending activity. The state regulator will inform you of the amounts.
- Locate, lease and furnish a suitable office for conducting business. Hire and train staff. Advertise your business and continue marketing. When you receive final, official approval from the regulator, you can commence business.