Global fintech and funding innovation ecosystem

What to Know About Starting an Online Lending Platform

Guest Post | Susan Melony | Jan 30, 2020

online lending - What to Know About Starting an Online Lending PlatformOnline lending platforms have been popping up everywhere. Many of them take the concept of brick-and-mortar short-term lending businesses and simply adapt them to an online environment. There are things that you have to think about with an online lending platform that you wouldn’t with a brick-and-mortar business, however.

For example, banks see people who are brokers of payday loans and other lending products as high-risk. For that reason, you’d likely have to find a high-risk merchant account provider to work with you and facilitate payments.

Even so, it is possible to start one of these businesses, and the following are some of the key things to know.

Consider Your Business Model

Having the right business model for an online lending business is important. This is the core foundation of your entire business.

The two options for an online loan business are consumer lending models and commercial lending.

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If you did a short-term loan business, it would likely fall into the category of commercial lending.

These models usually include loans in amounts of at least $1,000 with terms that range from 3 to 18 months.

The annual interest rates o these products may be anywhere from 13% to 71%.

Payday loans are also known as consumer online loans, and they’re usually available in small amounts of $500 or less, and they have to be paid off in two to four weeks. They may have interest rates that are as high as 400%.

Consumer loans have a lower amount of risk so if you’re an entrepreneur, you may find this appealing. Otherwise, you’re taking on a higher level of risk because you’re working with bigger amounts of money.

Along with having an idea of the general model you’ll follow, will you be a niche lender, or will you be a general lender?

Learn the Laws

One of the most challenging parts of setting up an online financial or lending business of any kind is the fact that you have to know all the laws and regulations at the federal level and the state level.

You are guided by stringent regulatory guidelines and not knowing these or not following them can mean big legal problems.

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Your state might not even allow for the business model you’re considering.

Some states ban any payday lending, while other states will put a cap on interest rates.

As of July 2019, new laws were put into place that focus on payday and car title loans.

For example, under the new laws, lenders are required to determine if borrowers are able to repay the debt they’re taking on, and there are limitations as to how payments can be collected from borrowers who overdraft their checking accounts.

Finding Investors

You’ll need to find investors or borrow money yourself in most cases if you want to start an online lending business and to do that you need to have a solid business plan in place first.

It’s tough to go through traditional means to get financing for any kind of online business, so independent investors could be a better option.

Merchant Services

The concept of merchant services and its role in what’s considered a high-risk online business was mentioned above. It’s incredibly important that you have a reliable merchant service before you can launch an online lending business since you have to collect payments from your customers electronically.

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You will need to be able to take credit card payments as well as ACH payments in most cases and getting approved for a merchant account as a high-risk business can prove challenging.

There are certain providers that work specifically with high-risk businesses, however.

Instabill merchant services - What to Know About Starting an Online Lending Platform

Creating Your Website

Once you’ve taken the above steps, you can start working toward setting up your site and actually getting the nuts and bolts of your business in place. You’ll need a domain name, you’ll need to build a website or have one built and you will need an SSL certificate.

An SSL certificate can encrypt the communications between your website and your customers.

You’ll have to focus quite a bit on making sure you have the most advanced security features on your site since you’re dealing with financial information.

Then, once you have these things in place, you can start marketing. Again, as is the case with getting a merchant account, you may not be able to advertise your lending business on traditional channels like social media, so you’ll have to rely more on SEO and alternative forms of marketing.

Source:  Guest post

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