So you have set your heart and mind on starting your own Microfinance Business.
Well, congratulations buddy!
With this post I aim to help ease out the way both cryptically and legally for what lies ahead in the road to success on your chosen path of endeavor. Read on to get to know more regarding the basics and intricacies of building a stellar and legally sound microfinance business from scratch.
What is Microfinancing?
Microfinancing refers to the practice of lending small sums of money to those unable to secure funds from traditional financial institutions.
While microlenders don’t really ask for collateral before loaning out money, for profit organizations may charge a high ROI to provide for mitigating financial risks in the event of defaulters being unable to pay back the loan.
Microlending ventures have emerged as a boon for entrepreneurs trying to make it big in their lives! Stick with me to know whether this business model is a good fit for you and the steps to be taken to achieve entrepreneurial success.
9 steps for building the perfect, legally sound microfinancing business
Step 1. Have a reliable blueprint for your business - Plan ahead well enough for any roadblocks, both foreseeable and the ones unaccounted for!
Research, research, and research, to ensure a foolproof plan for your business. We couldn’t stress enough on this point!!! Find out more and more about the following topics;
Giving your business the perfect name:
The name of your business will pretty much become its identity. Ensure that you come up with an ingenious one that packs a punch, is totally unique and one that hasn’t already been taken up!
Get an idea of how much profit your business can mint for you:
Know your area well, in some cases the home turf works to one’s advantage. Stay persistent and patient, even when the going gets tough. Studies have shown that 97% of borrowers return their borrowed amounts on the agreed upon terms, which is a pretty cool figure to bank on. If your profit margin is to the tune of 100$ per loan, you will need to seal 700 loans in the course of a year to make 70,000$.
What is the game plan behind making money?
Companies usually make profit by making and maintaining loans, the charges of which are added to the interest rate borne by the borrower.
How much should you ideally charge your customers?
Well the answer to this one depends on whether you are aiming to run a charity venture or a full-fledged for profit business. Interest rates vary widely from 10-80%, average being 35%. Some not-for-profit micro lending credit organizations also offer loans at no interest or at as little as 3% ROI.
Step 2. Curate a legal enterprise entity
To insulate yourself from being personally liable in case your microfinance venture gets sued, you should consider forming a legal business entity such as a Limited Liability Company (LLC). You have the freedom to choose from a variety of business structures such as, LLCs, corporations, or Doing Business As (DBA) names.
One must also consider using the services of a registered agent to protect your company and to stay compliant.
Step 3. Register for filing taxes
Before becoming a full-fledged business, the firm’s owner will need to register for a plethora of federal and state taxes.
To be able to register for taxes, you need to apply for an Employee Identification Number (EIN).
Step 4. Apply for a business bank account and credit card
If you choose to keep your personal and business accounts as one, your personal acquisitions such as your valuables, home and vehicle will be at risk in case your business gets sued. This in corporate terms is referred to as piercing the corporate veil. It also renders easy accounting and tax filing.
Getting a business credit card also helps you keep separate tabs on personal and business expenses by segregating both. It also makes you eligible for obtaining better interest rates and higher credit lines.
Step 5. Establish business accounting with best-in-class invoice management
If your microfinancing business accepts invoice payments online, you must be on the lookout for the best billing and invoicing software for businesses! Look no further people as Moon Invoice brings to you an all-in-one billing software app for businesses that can run on varied platforms.
Maintaining accurate records and detailed accounts, greatly eases the annual process of tax filing.
Step 6. Get requisite licenses and permits
Lack of procurement of required permits and licenses can result in large fines or even be the reason behind your business shutting shop.
Get the paperwork done folks!
Step 7. Get your business insured
To succeed and operate securely your business needs an insurance cover. It protects your company from incurring major setbacks in the event of the occurrence of a covered loss.
Familiarize yourselves with the different kinds of insurance policies sequestered for different types of businesses and their associated risks. You may consider beginning with General Liability Insurance or Workers’ Compensation Insurance in case your business has employees. Proper research is the keyword here.
Step 8. Give your brand a definitive identity
Building a strong brand identity, one that people can relate with, will help your business stand out amongst other competitors. To promote your micro-lending firm, you need to understand the area, the need that you are filling.
Conduct a survey about the financial lending opportunities in that area, study the group that you are targeting, and depending on your goals advertise door to door or consider setting up a website for online advertising.
To ensure that your customers keep coming back to you, be as fair a lender as possible. This doesn’t mean that you go easy on delayed payments, but hear your customers, and do what you say you will do. For this, you can use an expense report software.
Step 9. Create a strong web presence
A professional looking website is the first step towards building a solid brand image. It allows customers to understand your products/services and to learn more about your journey. You can also leverage social media platforms to attract new clientele.
To sum up, I would say that building or nurturing a microfinance business from scratch is no child’s play but neither is it rocket science. All you need to do is research well and follow the above-mentioned steps methodically to achieve good results.