How to Start a Peer to Peer Lending Business
Decide whether to incorporate your business., Register your business name., Register your domain., Build your team., Raise initial capital., Invest in p2p lending software., Design your website., Hire an attorney., Work with financial and banking...
Step-by-Step Guide
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Step 1: Decide whether to incorporate your business.
Incorporation will protect you and your initial startup team from personal liability.
Organizing your business either as a corporation or as an LLC can shield your personal assets from creditors.
Which entity you choose depends to a large extent on the size of your startup team and the level of formality you want.
Corporations typically have significantly more formal requirements than LLCs, including record keeping and reporting requirements.
You also must have a specific number of shareholder meetings each year, whereas these requirements typically don't exist with LLCs.LLCs also have a different tax status than corporations, although an LLC can elect to be taxed as a corporation, so the entity you choose may have little effect on your taxes, but you must make sure you understand the tax method you want to use. -
Step 2: Register your business name.
You typically must register your name with the states in which you plan to do business.
Keep in mind that although your business name may be the same as your domain name, these are not the same thing.
You may want to use a broader name as your business name in anticipation of opening more websites under different domain names in the future.
The rules governing registration of business names vary widely among states, so make sure you understand the registration and filing requirements for the state in which you plan to register your business.The state will have a directory of business names, and you must choose one that isn't already registered by someone else in that state.
Depending on which entity you've chosen, your business name typically must identify that entity.For example, if you've chosen to register as a corporation, your name may be "P2P Lending, Inc." However, if you've organized as an LLC, you must use "P2P Lending, LLC" instead.
You must file the paperwork required by your state, which typically includes your articles of organization and may include other formation documents, and pay registration fees., Choose a domain name that is easy for potential customers to remember.There are a number of domain registration services such as Go Daddy or Domain.com where you can not only register a domain but also add email and hosting services as needed.
Choosing a unique domain name can preserve your ability to trademark the name or a logo at a later date, if you choose to do so. , In addition to people who know how to operate a website, you should also include team members who have knowledge of banking and financial regulations and know how to run a business.
Your team should include at least one attorney who has experience navigating state and federal regulation of the lending sector.You also should look for someone who has extensive experience in the banking industry, and understands how to assess credit risk and build a lending business.Don't scrimp on software engineers and tech assistance.
Although you may be able to outsource much of this need depending on the platform and hosting services you choose, you must have dedicated team members who can react quickly to resolve any problems that may arise.You also should consider bringing someone on your team who has education and experience in marketing and advertising.
If you don't have someone in-house, you probably will have to start an account with a marketing firm, which could become more expensive in the long run.Someone with strong relationships in capital markets can be valuable in helping you raise the initial capital you'll need to get your p2p lending business off the ground.
If you don't know or have any connections to venture capitalists and investors, you may have difficulty raising the funds necessary to enable your startup to continue operations through early growth periods before you're turning a profit.While you can have an outside attorney or firm on retainer, hiring someone as in-house counsel can be a tremendous asset and provide you with more flexibility and ensure that you stay in compliance with regulations that may evolve rapidly., In addition to running your website and other operating expenses, you'll need money to borrow to your first customers before p2p investors start putting up money.
Even though you'll be in the business of lending money to other people (or connecting them with people willing to lend to them), it's important at this stage to understand your credit score and credit history, because that will determine how much initial capital you can raise and what investors are willing to work with you.How much money you'll need will depend on how many loans you need to finance on your own before your website takes off and you have private investors funding the requested loans.
Keep in mind that this could take some time.You will need to use this money to establish a relationship with an originating bank, which will be the bank through which all of your p2p loans are serviced., Although you could build your system architecture from scratch, it probably makes more sense to subscribe to an existing program.
There are a number of web development companies that offer either raw codes and scripts that you can adapt to your system.Other companies have more plug-and-play type system solutions, providing you with an entire platform that you simply customize with names and titles to suit your needs.If you're low on funds, you might check out Zidisha, a p2p lending company that offers micro loans to entrepreneurs in developing countries.
The organization has released the source code of their entire platform under an open-source license for anyone to use.These software solutions automate many of the processes you'll need, including the application and screening processes for borrowers and security and protections for lenders., Your final product should be intuitive, easy to understand, and easy to navigate for both lenders and borrowers.
Some of the p2p lending platforms include basic web design, but you'll want to adapt and customize this to make your site stand out in the field.
Make sure all the basic functions someone would need to do are clear and available.
For example, if someone comes to your site and wants to apply for a loan, you don't want him or her to have to hunt around for the application form.
Similarly, if someone wants to invest and become a lender, you want that to be easy to do.
When you develop your website, focusing on the customer experience is vital.If people visiting your site can't figure out how to do what they want to do, and can't get help when they need it, they will go somewhere else. , If you haven't already, hiring an attorney is imperative if you want to avoid running afoul of the many complex securities and banking regulations that affect p2p lending.
There are many businesses you can start without necessarily needing an attorney, but a p2p lending business is not one of them.
If you intend to enter this sector, you should have legal counsel in place before you sign the first loan agreement.Keep in mind that both the consumer credit side and the funding side of your business are subject to extensive regulation, and many of these areas of law are in flux as the legislative process plays catch-up with the rapid development of the p2p lending sector., Finance and consumer credit professionals can help you ensure all your policies and procedures stay up-to-date and in compliance.
If you haven't already, make sure your startup team includes someone with extensive education and experience in the banking sector.
Ideally, you want to add someone to your team that has years of senior or upper-level management experience in a financial institution.Keep in mind this person won't come cheap.
Experienced finance investors can put systems in place to effectively score your borrowers and lower the inherent risks involved with p2p lending.Keep in mind that many federal laws, including the Electronic Fund Transfer Act, the Fair Credit Reporting Act, and the Bank Secrecy Act, will likely apply to your p2p lending business.Someone with experience in the banking and finance industry will already know what to do to keep the company from violating these laws. , Federal consumer credit laws forbid the use of certain discriminatory practices in lending.
The Equal Credit Opportunity Act establishes guidelines you must follow when you gather and evaluate your borrowers' credit information, as well as the content of the written notification you must provide if you deny credit.Keep in mind that most of the borrowers you attract will come with a significant amount of risk.
Typically people attracted to p2p lending are people who have been turned away by traditional lending institutions.For this reason, it's imperative that you develop an adequate process to screen and qualify borrowers.
However, your screening process cannot disqualify or penalize people for unlawful reasons such as race, sex, religion, or marital status., Your loan agreement generally must comply with the federal Truth in Lending Act, which establishes uniform methods for disclosing credit terms.All terms should be laid out in writing explicitly, in words that your customers will understand.
Although you can use the terms and conditions from traditional bank loans as samples to guide you, make your loan agreement your own and tailor the terms to suit the product you're offering.Using traditional bank terms as a guide also can help ensure that you're meeting the requirements of federal law by including certain conditional language and types of disclosures.Keep in mind that just like traditional banks, you can make money off of more than just interest.
Your loan agreement should include fees or penalties for late payments or insufficient funds.
You can look at traditional bank loan terms to get an idea of where you can charge those fees, but you probably want to keep your fees lower than traditional banks., Apart from federal regulations, your state may have additional registration and filing requirements for p2p lending institutions.
Keep in mind that you must make sure you have the appropriate licensing in every state in which you anticipate brokering, making, or servicing loans.
If you have a website, this potentially means having licensing in place in all 50 states.State licensing requirements typically include certain bookkeeping and reporting requirements, minimum net worth, and the posting of a surety bond.Since each state's requirements will differ depending on the size of the loan being made, the length of the loan, and the interest rates and fees, you might consider reviewing these regulations to determine which states it makes the most sense to exclude.
If a handful of states have licensing requirements far out of step with the majority, for example, you can choose not to service those states.Make sure you clearly display at appropriate places on your website the states in which your services are not available.
Using an established bank can be efficient in getting you around all these individual state licensing requirements., Partnering with an established bank may allow you to offer a broader variety of loan and investment products.Partnering with an existing traditional bank also solves many of the regulation problems involved with your loan products, since the bank will already have compliance procedures in place.
Additionally, given that you are a newcomer to the scene with no operating history, potential lenders may feel more comfortable investing their money if you are backed by a bank with an established track record of profitability.
Keep in mind that typically you will need an originating bank to initiate loans and issue notes to your private investors who have agreed to fund the loan.However, you may wish to partner with other banks to gain other services or offer additional products to your customers. , Because there are so many p2p lending companies out there, you must find a way in which what you have to offer is different from all the others if you want to stand out.For example, you might choose to focus your business on just one type of lending, such as loans for people who want to pay off or pay down their student loans.
Many of the most established p2p lending companies started with personal loans and are starting to move towards small business loans, so you may want to create a niche there.For example, you might decide to focus primarily on small business loans for people who want to open restaurants.
Keep in mind that with more and more players entering this sector, the market is extremely competitive.To build a successful p2p lending business, you must set your service apart from the crowd.
Focus your marketing efforts on what it is about your business that makes you unique. , Corporate and financial projections can be used to educate potential lenders and borrowers alike about the value of your service.
You potentially will need to file certain documents with the SEC, including a yearly prospectus, sales reports, and other filings.
Providing open access to these documents on your website will attract prospective investors who want more information about your company's financial structure and health.Other business planning documents can help legitimize your p2p lending business in the eyes of the public and make potential investors more comfortable working with you. , Press attention can be an efficient and cost-effective way to draw attention to your business.
Press attention (along with word-of-mouth) may be the best way to attract investors willing to lend money through your business.
Because p2p lending already carries inherent risks, investors will be more likely to use your service if an established authority speaks highly of it.You might consider starting with popular and respected financial or business websites.
Bloggers for these websites are under a lot of pressure to produce content, and often are looking for up-and-coming businesses to write about. , If you advertise to borrowers first, lender-investors looking to expand and diversify their portfolios will naturally follow.
Most of the existing p2p lending businesses have had less difficulty attracting investors than attracting qualified borrowers, leading to greater available investor money than there is borrower demand.Having a unique angle allows you to focus your advertising on the particular borrowers you're seeking to attract, which can save you money relative to broad campaigns aimed at all consumers looking for personal loans.
Maintaining an active presence in social media can help you build your business using word of mouth. -
Step 3: Register your domain.
-
Step 4: Build your team.
-
Step 5: Raise initial capital.
-
Step 6: Invest in p2p lending software.
-
Step 7: Design your website.
-
Step 8: Hire an attorney.
-
Step 9: Work with financial and banking professionals.
-
Step 10: Establish anti-discrimination policies.
-
Step 11: Draft a comprehensive loan agreement.
-
Step 12: Evaluate state and local regulations.
-
Step 13: Consider partnering with a bank.
-
Step 14: Develop a unique angle.
-
Step 15: Create informational documents.
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Step 16: Seek out press coverage.
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Step 17: Advertise to borrowers.
Detailed Guide
Incorporation will protect you and your initial startup team from personal liability.
Organizing your business either as a corporation or as an LLC can shield your personal assets from creditors.
Which entity you choose depends to a large extent on the size of your startup team and the level of formality you want.
Corporations typically have significantly more formal requirements than LLCs, including record keeping and reporting requirements.
You also must have a specific number of shareholder meetings each year, whereas these requirements typically don't exist with LLCs.LLCs also have a different tax status than corporations, although an LLC can elect to be taxed as a corporation, so the entity you choose may have little effect on your taxes, but you must make sure you understand the tax method you want to use.
You typically must register your name with the states in which you plan to do business.
Keep in mind that although your business name may be the same as your domain name, these are not the same thing.
You may want to use a broader name as your business name in anticipation of opening more websites under different domain names in the future.
The rules governing registration of business names vary widely among states, so make sure you understand the registration and filing requirements for the state in which you plan to register your business.The state will have a directory of business names, and you must choose one that isn't already registered by someone else in that state.
Depending on which entity you've chosen, your business name typically must identify that entity.For example, if you've chosen to register as a corporation, your name may be "P2P Lending, Inc." However, if you've organized as an LLC, you must use "P2P Lending, LLC" instead.
You must file the paperwork required by your state, which typically includes your articles of organization and may include other formation documents, and pay registration fees., Choose a domain name that is easy for potential customers to remember.There are a number of domain registration services such as Go Daddy or Domain.com where you can not only register a domain but also add email and hosting services as needed.
Choosing a unique domain name can preserve your ability to trademark the name or a logo at a later date, if you choose to do so. , In addition to people who know how to operate a website, you should also include team members who have knowledge of banking and financial regulations and know how to run a business.
Your team should include at least one attorney who has experience navigating state and federal regulation of the lending sector.You also should look for someone who has extensive experience in the banking industry, and understands how to assess credit risk and build a lending business.Don't scrimp on software engineers and tech assistance.
Although you may be able to outsource much of this need depending on the platform and hosting services you choose, you must have dedicated team members who can react quickly to resolve any problems that may arise.You also should consider bringing someone on your team who has education and experience in marketing and advertising.
If you don't have someone in-house, you probably will have to start an account with a marketing firm, which could become more expensive in the long run.Someone with strong relationships in capital markets can be valuable in helping you raise the initial capital you'll need to get your p2p lending business off the ground.
If you don't know or have any connections to venture capitalists and investors, you may have difficulty raising the funds necessary to enable your startup to continue operations through early growth periods before you're turning a profit.While you can have an outside attorney or firm on retainer, hiring someone as in-house counsel can be a tremendous asset and provide you with more flexibility and ensure that you stay in compliance with regulations that may evolve rapidly., In addition to running your website and other operating expenses, you'll need money to borrow to your first customers before p2p investors start putting up money.
Even though you'll be in the business of lending money to other people (or connecting them with people willing to lend to them), it's important at this stage to understand your credit score and credit history, because that will determine how much initial capital you can raise and what investors are willing to work with you.How much money you'll need will depend on how many loans you need to finance on your own before your website takes off and you have private investors funding the requested loans.
Keep in mind that this could take some time.You will need to use this money to establish a relationship with an originating bank, which will be the bank through which all of your p2p loans are serviced., Although you could build your system architecture from scratch, it probably makes more sense to subscribe to an existing program.
There are a number of web development companies that offer either raw codes and scripts that you can adapt to your system.Other companies have more plug-and-play type system solutions, providing you with an entire platform that you simply customize with names and titles to suit your needs.If you're low on funds, you might check out Zidisha, a p2p lending company that offers micro loans to entrepreneurs in developing countries.
The organization has released the source code of their entire platform under an open-source license for anyone to use.These software solutions automate many of the processes you'll need, including the application and screening processes for borrowers and security and protections for lenders., Your final product should be intuitive, easy to understand, and easy to navigate for both lenders and borrowers.
Some of the p2p lending platforms include basic web design, but you'll want to adapt and customize this to make your site stand out in the field.
Make sure all the basic functions someone would need to do are clear and available.
For example, if someone comes to your site and wants to apply for a loan, you don't want him or her to have to hunt around for the application form.
Similarly, if someone wants to invest and become a lender, you want that to be easy to do.
When you develop your website, focusing on the customer experience is vital.If people visiting your site can't figure out how to do what they want to do, and can't get help when they need it, they will go somewhere else. , If you haven't already, hiring an attorney is imperative if you want to avoid running afoul of the many complex securities and banking regulations that affect p2p lending.
There are many businesses you can start without necessarily needing an attorney, but a p2p lending business is not one of them.
If you intend to enter this sector, you should have legal counsel in place before you sign the first loan agreement.Keep in mind that both the consumer credit side and the funding side of your business are subject to extensive regulation, and many of these areas of law are in flux as the legislative process plays catch-up with the rapid development of the p2p lending sector., Finance and consumer credit professionals can help you ensure all your policies and procedures stay up-to-date and in compliance.
If you haven't already, make sure your startup team includes someone with extensive education and experience in the banking sector.
Ideally, you want to add someone to your team that has years of senior or upper-level management experience in a financial institution.Keep in mind this person won't come cheap.
Experienced finance investors can put systems in place to effectively score your borrowers and lower the inherent risks involved with p2p lending.Keep in mind that many federal laws, including the Electronic Fund Transfer Act, the Fair Credit Reporting Act, and the Bank Secrecy Act, will likely apply to your p2p lending business.Someone with experience in the banking and finance industry will already know what to do to keep the company from violating these laws. , Federal consumer credit laws forbid the use of certain discriminatory practices in lending.
The Equal Credit Opportunity Act establishes guidelines you must follow when you gather and evaluate your borrowers' credit information, as well as the content of the written notification you must provide if you deny credit.Keep in mind that most of the borrowers you attract will come with a significant amount of risk.
Typically people attracted to p2p lending are people who have been turned away by traditional lending institutions.For this reason, it's imperative that you develop an adequate process to screen and qualify borrowers.
However, your screening process cannot disqualify or penalize people for unlawful reasons such as race, sex, religion, or marital status., Your loan agreement generally must comply with the federal Truth in Lending Act, which establishes uniform methods for disclosing credit terms.All terms should be laid out in writing explicitly, in words that your customers will understand.
Although you can use the terms and conditions from traditional bank loans as samples to guide you, make your loan agreement your own and tailor the terms to suit the product you're offering.Using traditional bank terms as a guide also can help ensure that you're meeting the requirements of federal law by including certain conditional language and types of disclosures.Keep in mind that just like traditional banks, you can make money off of more than just interest.
Your loan agreement should include fees or penalties for late payments or insufficient funds.
You can look at traditional bank loan terms to get an idea of where you can charge those fees, but you probably want to keep your fees lower than traditional banks., Apart from federal regulations, your state may have additional registration and filing requirements for p2p lending institutions.
Keep in mind that you must make sure you have the appropriate licensing in every state in which you anticipate brokering, making, or servicing loans.
If you have a website, this potentially means having licensing in place in all 50 states.State licensing requirements typically include certain bookkeeping and reporting requirements, minimum net worth, and the posting of a surety bond.Since each state's requirements will differ depending on the size of the loan being made, the length of the loan, and the interest rates and fees, you might consider reviewing these regulations to determine which states it makes the most sense to exclude.
If a handful of states have licensing requirements far out of step with the majority, for example, you can choose not to service those states.Make sure you clearly display at appropriate places on your website the states in which your services are not available.
Using an established bank can be efficient in getting you around all these individual state licensing requirements., Partnering with an established bank may allow you to offer a broader variety of loan and investment products.Partnering with an existing traditional bank also solves many of the regulation problems involved with your loan products, since the bank will already have compliance procedures in place.
Additionally, given that you are a newcomer to the scene with no operating history, potential lenders may feel more comfortable investing their money if you are backed by a bank with an established track record of profitability.
Keep in mind that typically you will need an originating bank to initiate loans and issue notes to your private investors who have agreed to fund the loan.However, you may wish to partner with other banks to gain other services or offer additional products to your customers. , Because there are so many p2p lending companies out there, you must find a way in which what you have to offer is different from all the others if you want to stand out.For example, you might choose to focus your business on just one type of lending, such as loans for people who want to pay off or pay down their student loans.
Many of the most established p2p lending companies started with personal loans and are starting to move towards small business loans, so you may want to create a niche there.For example, you might decide to focus primarily on small business loans for people who want to open restaurants.
Keep in mind that with more and more players entering this sector, the market is extremely competitive.To build a successful p2p lending business, you must set your service apart from the crowd.
Focus your marketing efforts on what it is about your business that makes you unique. , Corporate and financial projections can be used to educate potential lenders and borrowers alike about the value of your service.
You potentially will need to file certain documents with the SEC, including a yearly prospectus, sales reports, and other filings.
Providing open access to these documents on your website will attract prospective investors who want more information about your company's financial structure and health.Other business planning documents can help legitimize your p2p lending business in the eyes of the public and make potential investors more comfortable working with you. , Press attention can be an efficient and cost-effective way to draw attention to your business.
Press attention (along with word-of-mouth) may be the best way to attract investors willing to lend money through your business.
Because p2p lending already carries inherent risks, investors will be more likely to use your service if an established authority speaks highly of it.You might consider starting with popular and respected financial or business websites.
Bloggers for these websites are under a lot of pressure to produce content, and often are looking for up-and-coming businesses to write about. , If you advertise to borrowers first, lender-investors looking to expand and diversify their portfolios will naturally follow.
Most of the existing p2p lending businesses have had less difficulty attracting investors than attracting qualified borrowers, leading to greater available investor money than there is borrower demand.Having a unique angle allows you to focus your advertising on the particular borrowers you're seeking to attract, which can save you money relative to broad campaigns aimed at all consumers looking for personal loans.
Maintaining an active presence in social media can help you build your business using word of mouth.
About the Author
Brandon Myers
Professional writer focused on creating easy-to-follow crafts tutorials.
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