How to Start a Payday Loan Business

Payday loan businesses can be incredibly lucrative to the business owner. While owners inherit the risk involved in loaning money to people without first securing collateral, they often stand to make a big profit from the high interest rates that are charged on this type of loan.

1. Draw up your business plan. If you are starting your own original business, you will need to write a detailed business plan. Include all aspects of your business and hiring process, company policies, estimated start-up costs and a profit projection for the next two years. If you wish to purchase an existing payday loan franchise, you can skip this step.


2. Obtain financing. If you do not have a large amount of capital to invest in your new business, you will need to secure financing to cover your start-up costs. Contact your local bank or credit union and begin the small business loan process. You will likely be required to present your business plan or provide the bank with evidence of your intent to purchase a franchise.


3. Analyze your finances and determine an acceptable loss factor. You should know how much funding you have available in case of client default. If your clients fail to repay their loans, how long will you be able to stay in business?


4. Choose a location. You can elect to either lease or purchase a location for your payday loan business. Choose your location wisely. It should have a decent amount of foot or vehicle traffic. Your office does not need to be very large for this type of business.


5. Complete the required legal paperwork. There are many regulations that apply to a payday loan service. Take the time to learn and understand each of these regulations. Choose a name for your business and complete the necessary paperwork to legally incorporate your new company. Visit the IRS website and complete your application to obtain a federal tax ID number. Learn about any state requirements and complete the necessary forms.


6. Choose your loan qualifications and draw up a contract. It is a good idea to seek the guidance of an experienced attorney in drawing up your official loan contracts. This will help to ensure that your company is adequately protected in the case of a default or lawsuit. Decide how your company will qualify customers for a loan. Most payday loan companies require a copy of a recent paystub, a copy of last year's tax return and two forms of ID. You might also choose to run a credit check on your loan customers.


7. Advertise your services. Let customers know that your loan service is open for business by running ads in your local newspaper or classifieds. If you have the funds available, you might also run a radio or television ad.