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How To Start A Consumer Lending Business

Till recent years, the lending industry was strongly associated with banks, credit unions, and other financial organizations. The area was rather complicated and required a large staff to operate.

With the development of digital technologies and automated tools, starting a lender business has become much simpler and less time-consuming. 

Let’s analyze the process of starting a lending business step by step.

What is consumer financing?

The term consumer financing refers to the financial tool that enables customers to pay for services or goods in installments instead of repaying the whole sum at once. 

In the case of consumer financing, the lenders either offer their own funds or get them from third-party lending companies, such as banks, credit unions, or other alternative funding institutions. 

This enables customers to purchase high-ticket goods that they wouldn’t buy if they are sold without installments. The retailers can convert passive browsers into active buyers by offering them consumer finance programs.

The rise of digitization of consumer lending helps shorten the distance between buyers and sellers. Fast and convenient online customer financing allows retailers to easily turn potential clients into regular customers by offering them transparent lending programs on fair and understandable conditions.

The rise of digitization of consumer lending helps shorten the distance between buyers and sellers. Fast and convenient online customer financing allows retailers to easily turn potential clients into regular customers by offering them transparent lending programs on fair and understandable conditions.

Mikhail Chirkunov
Chief Product Officer

The fairer and simpler the consumer financing program is, the better the conversion rate of potential clients into loyal repaying customers. 

Consumer financing can be applied not only to luxury or high-ticket goods. It can be used to fund a wide range of services or goods.

Due to the development of digital technologies, online consumer lending made instantaneous purchasing very fast and convenient. 

Figure 1 shows the areas of consumer lending with top KPIs: auto financing, vacation and recreation, credit card issuing, luxury and electronic equipment purchasing. 

spheres of consumer lending with the highest kpis

Figure 1. Spheres of consumer lending with the highest KPIs

Consumer financing. The way it works

Simply put, consumer financing is a form of crediting when a loan is repaid for a certain period of time in equal installments. A lender defines the amount of the down payment and collects monthly payments with interest rate until the loan is repaid.

The most crucial reason for outsourcing the service to banks or other alternative lenders is the complexity of accurate risk evaluation and borrower creditworthiness assessment. 

Now, with a wide range of digital technologies for lenders, it’s easy to automate risk evaluation, loan origination, decisioning, servicing, collection, and reporting without hiring an underwriting department. 

Now, it’s much easier for alternative lenders to get a competitive edge over traditional banks or credit unions. Due to intelligent automation of the lending process at all stages and bank-grade software solutions available for everyone, lending has become safer for lenders and more transparent for borrowers. 

The opportunities to launch an online store, start POS financing or issue student loans have become easily accessible to anyone due to online lending automation solutions delivered by experienced software providers. 

The spheres for online lending are versatile, from secured and unsecured personal lending to POS financing and real estate crowdfunding. Figure 2 shows the available touchpoints for online lending.

online lending application touchpoints

Figure 2. Online lending application touchpoints

Consumer lending company. Steps to start

To successfully launch a lending company, it’s necessary to have a clear picture of how to start a money lending business. Here is a small guide to follow for you.

Business model selection

The online lending industry usually embraces two major business models. The first is focused on consumer lending. The other one has its specialization in commercial lending. They often differ in amounts of funding, interest rates, and repayment periods.

Commercial lending programs are usually referred to short-term loans as a prominent type of loan to operate with. Their characteristics are:

  • Loan amounts from $1,000
  • The repayment period is 3-18 months
  • 13-70% annual interest rates

Online consumer loans (also known as “payday loans”) usually have the following conditions:

  • The funding amount is up to $500
  • 2-4 weeks for repayment
  • Interest rates may go up to 400%

Consumer loans are more appealing to lending companies due to the low-risk rate and smaller funding amounts. In addition, they are offered at significantly higher interest rates and their turnover is much faster than that of business loans.

Business or commercial loans are often less risky and have a comparatively low default probability. But they bring lower profit margins and are repaid in a longer period of time.

Compliance with state legislation and local regulations

Yet online lending is as simple as a few clicks of the mouse, this convenience is often accompanied by the complexity of government regulations and laws. 

Without knowing the laws and complying with them, the lending business has a risk of being penalized or even closed. Consultations with experts in the sphere of legislation are vital to ensure full compliance of the lending business.

Business plan creation

After outlining the online lending model type and clearing out laws regulating the industry, the next challenge is writing a detailed business plan. It should be clear and comprehensive and contain the following parts:

  • An executive summary should contain the description of what you plan to do, market challenges and opportunities, your leadership qualifications, and advantages in comparison with competitors.
  • The detailed business description should comprise full information about strategies of lending and interest rates, describe online branding, operational points of interest, and marketing plans.
  • Market research should demonstrate your expertise in the industry, online lending statistics, the potential for revenue, marketing of services, growth points, and expected challenges.
  • Team description should include information about the founder and all key team members, and describe their experience and skills that add value to the business for the potential investors.
  • Financial data should have detailed projections and reports on anticipated losses and profit, expected revenue, operational costs calculation, and cash flow statements for at least three next years.

Business planning

During the stage of planning, it’s necessary to choose a brand name and incorporation type, and figure out the way of lending company financing. It’s vital to have consultations with all necessary experts or attorneys at this stage to clear up all disputable questions.

Underwriting criteria are also defined at this stage for efficient and fast loan application assessment while staying compliant with different legal rules and regulations governing the market.

Search of funding sources

The funding of an online lending company can be realized either by the founder, investors, or have a mixed basis. 

It’s possible to collect the necessary funds from family, friends, or through crowdfunding. The involvement of independent investors is often more complicated because they usually carefully study the perspectives of the future lending endeavor.

A mixed or hybrid approach is a usage of funding from private investors and commercial loans to get to a point of launching the business.

Obtaining merchant services

The availability of reliable and fair merchant services is the right start for an online lending business. Since all payments are collected electronically, the appropriate equipment for card processing is a must-have for accepting direct payments and credit cards.

But obtaining approval for payment processing can be rather complicated in the lending industry because alternative lenders are often ranked as “highly risky” by banks.

Site launching

As a qualified lender, you need to have an official website to maintain your brand. To launch a site, it’s necessary to find an experienced web developer.

The web developer should have a full understanding of the importance of designing a GDPR-compliant website for the company. To ensure website security, it’s necessary to implement effective security and encryption services for the protection of borrowers’ financial and personal information.

Building a contingency plan

A contingency plan is another must, since starting to extend loans to customers. It’s necessary for the continuous evolution of business strategy and for building further experience and knowledge. 

Bearing in mind the changes in legislation and local rules, contingency plan development is a wise choice to always comply with them and stay as flexible and adaptable as possible.

Digital solutions for online lending

While launching an online money lending business, you may face lots of challenges on the way. At ABLE Platform, we hope our small guide will help you solve the majority of them. As well, software solutions designed by our team can lead your lending business to success.

If you're interested to know how digital lending software can automate your online lending, get in contact with us. You'll always get a free consultation and assistance.
Mikhail Chirkunov
Mikhail Chirkunov
Chief Product Officer
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