Starting a Micro Lending Business

One of the hottest trends in finance today is micro lending. This is the lending out of small amounts of cash, usually without collateral. The concept has been adopted successfully by both profit and non-profit organizations, especially cooperatives. Millions of people have benefited from access to the loans provided by micro lending companies.

Micro lending has caught on even with banks and other financial institutions that previously thought it was not feasible. It turned out that most of the small time borrowers were also good payers, and since the interest rates were higher than the usual mark-up of banks or financing companies, the practice became attractive to the large lenders.

For entrepreneurs who wish to go into this promising business, there many things to learn to be successful. Here are some pointers for those who plan to put up their own microlending business:

• Locate in a secure place near your market. For practical reasons, it is usually best to be located near your target market. Security must also be a consideration because you will be handling cash, so being near a bank would lessen the risk of robbery in transit.

• Incorporate your company with the Securities and Exchange Commission. Cooperatives, however, are registered with the Cooperative Development Authority. The current law does not allow sole proprietorships or partnerships to go into the money lending business.

• Have sufficient capitalization. There must be a minimum paid up capital of P1 million. In actual practice, how you allocate your capital will affect the viability of the business. Conserve on expenses like renovation and expensive furnishings, as this will allow you to have more funds available for lending out.

• Be knowledgeable of the laws governing the business. You must know and comply with the laws pertaining to the micro lending business. The most important is the Lending Company Regulation Act of 2007. To be able to apply this, you must also read the implementing rules and regulations of the laws. Some of the other relevant laws are the Truth in Lending Act and the Consumer Act.

• Learn how to compute the amortization and documentation of loans. This is important so that your customers will be billed correctly and you get the right margin. Proper documentation of the loan is critical later on when you have to take legal action in order to collect.

• Be careful in screening clients. The best way to reduce losses due to bad debts is to avoid poor payers in the first place. To do this, there must be a thorough credit investigation to assess character. Collateral must be treated only as a secondary remedy because of the long and difficult process of foreclosing.

• Take advantage of the small claims court. To minimize your collection expenses, you should pursue bad debtors in the small claims court. This court will save you money in legal expenses because lawyers are not allowed in the proceedings. However, the court will only hear cases if the original principal amounts to not more than P100,000; but almost all loans in micro lending are below that amount anyway.

There will always be a big demand for small loans, and the micro lending entrepreneur is well placed to cater this need. Want to learn more about this business?

BusinessCoach, Inc., a leading business seminar provider, conducts seminars on how to start this venture. Click here to view details of the seminar: How to Start a Micro-Lending Business »

*Originally published by the Manila Bulletin. Written by Ruben Anlacan, Jr. (President, BusinessCoach, Inc.) All rights reserved. May not be reproduced or copied without express written permission of the copyright holders.