Tips for Getting Started as a Lender

Note, this article is talking about lending in the United States of America. If you are located in another country, the rules may be totally different (or nonexistent).

Investing in loans can be a very profitable and effective business. State and Federal laws affect what a lender legally can and can’t do, and licensing fees may apply in a variety of situations. Here are some pointers to help get you started on the road to profit.

Banker’s Licenses, Lender’s Licenses and Exempt Lending

The licensing fees to become a lender can be pretty steep, especially for a small lender. Many states require any business that advertises itself as a lending business have a license as a lender. Payday loan companies, mortgage lenders, and personal loan companies will usually have to obtain a license to make loans in any state where they do business. The fees and bonds required that I’ve seen are usually around $10,000 annually for a banker’s license and around $2,500 for a regular lender’s license. Some states will also require proof of credit from a bank in the ballpark of $100,000, or proof of personal or business liquid assets in the same ballpark. If you’re seasoned, this is fine. If you’re getting started without major financial backing, this is probably going to sink the ship.

There’s usually an exemption to these requirements if you offer financing for goods or services you provide. This applies to in-house financing for car dealerships, in-house financing on furniture and appliance sales, retail store lines-of-credit, or financing on the charges for any kind of service provided. If you have an existing business, you can become a lender to your customers by offering in-house financing on their purchases. This is a great, low-cost-of-entry on-ramp for lenders that have some other business they can use to build a healthy loan portfolio.

Getting Credit Reports

Credit reports are critical when determining if a borrower is creditworthy. Each of the major credit bureaus has a variety of avenues for obtaining credit reports. Pick one or more bureau (TransUnion, Equifax, and/or Experian) and enroll in any of their programs for accessing consumer credit reports. Prices can range from $15 to $35 per report (or more) and there are lots of extra features the bureaus provide which may be suitable depending on the nature of your loans. Because the information they provide is the holy grail of identity theft, you’ll have to demonstrate your legitimacy before they’ll share consumer data. Once you’re enrolled, you’ll be able to access credit scores and credit reports through their websites.

Submitting Credit Reports

It’s not mandatory that you submit the loan details to credit bureaus, but it will add leverage to your position as the lender and help other lenders make better decisions when loaning to your borrower. Loan servicing software like Moneylender Professional is able to generate the Metro2 formatted data required by the credit bureaus. You’ll need to set up accounts with each credit bureau to submit data. Some lenders only submit to one bureau but most large lenders submit their data to all three. You can decide where you’re at and what submission rules you want to use for your business.

Finding Borrowers

If you’re doing in-house financing, you already have a source of new borrowers to work with. If your business is exclusively a lending business, finding borrowers can be challenging. Many lenders buy loans from other businesses. Depending on your state, you’re probably required to obtain a lender license if you want to buy and sell loans. You can contact banks, credit unions and other lenders to see if they're interested in selling loans to you. In addition to standard advertisements across whatever local media is available, contacting local retailers of large purchase items like cars, trailers, boats, ATVs, appliances, furniture, farm or industrial equipment, home improvement supplies, musical equipment, artwork, medical equipment, etc. is a good way to create relationships that bring in new borrowers.

Make sure your borrowers are well qualified before giving them your money!

If you’re making mortgage loans, this article is probably waaaaay beneath you and you’re already up to your elbows in regulations, paperwork and the mortgage market. (Or you did an owner-carry back, which is great and you’re not probably going to be making many other loans anyway!)

I hope this info was at least a little helpful for anyone looking at starting a lending business. Obviously, there’s a lot more to it than this. Read and understand your local laws – violations are often a criminal offense! 

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