One of the major challenges faced by SMEs is how to get money to start or run the business smoothly. Adequate capital is very important to the success of any business especially when the business is still at the startup stage. At this stage, adequate funds are needed to keep it running even before the profits starts to stream in.
In the quest to get adequate funding for their businesses, many business owners go from bank to bank trying to secure loans. This, of course could be frustrating and cumbersome most of the time. Due to the frustrating process and requirements involved in getting bank loans, many businesses have been forced to quit, relocate or change business lines.
Going to moneylenders for business financing is arguably a better option for getting start-up and running capital for most businesses today. Besides business and business financing, there are many individuals/paid employees today who are also in need of extra cash to pay for their piling bills or take care of the ever-increasing high cost of living before the salary comes in.
Starting a money lending business or loan business could, therefore, become a good choice for an aspiring entrepreneur who is interested in venturing into the Financial Services industry. Of course, you must have a considerable start-up capital and a good understanding of how the financial business climate works. By starting a loan business in Nigeria, you would solve a substantial part of the problem faced by many Small and Medium Enterprises (SMEs) and make appreciable gain in the process.
What is Loan Business About?
Loan business or Money lending is simply giving another individual/business money with a written agreement that the said individual/business would pay back the money with an agreed upon interest. It is a business that is lucrative and is not as heavily regulated as other financial institutions like Banks, Insurance Companies, Mortgage Houses, Mutual Funds Companies, etc.
This business of money lending has been delegated to various states in Nigeria and is being regulated by them. For example, in Lagos State, Section 4 of the Money Lenders’ Law of Lagos state defines a money lender as someone who lends out money at an interest or lends an amount out in lieu of getting paid back a larger sum of money. What this simply means is that anyone who lends money to get interest later on it is presumed to be a money lender. Note that this law only applies to people who are actively involved in the money lending business and not individuals who lend money to friends who are in need.
Business Structure of Loan Business in Nigeria
The main selling point for money lending businesses or loan businesses in Nigeria is the assurance of getting back an interest on a sum of money loaned out to an individual. It is no news that lending money can be a risky thing to do, especially to start-ups. This is why the interest rate has to be substantial to cover the potential risk of losing a particular investment.
A money lending business requires you to develop a good business structure and obtain all the necessary government licences. Starting out, you would most likely have to use your own money as a starting fund for your loan business. If this is what you wish to do which I strongly advise, you would, therefore, be running a Private Lending Business. “Private” in the sense that you would be the sole financier of the business without the need for investors.
A moneylender’s success lies in his/her ability to spot people that truly deserve a loan and weed-out those who could cause trouble in the future after obtaining the loan. Putting down a proper business plan and conducting adequate feasibility studies before starting the business will open your eyes to the likelihood of success or failure of this business and also the future growth opportunities it has.
There are various ways by which moneylenders offer their services such as checks cashing, instalment loans, advances on paydays, mortgage and other small credit services. These types of services cannot be provided by large banks.
Why Licensing Is Fundamental in Money Lending Business
Just borrowing people money does not automatically make you a moneylender. To be in this line of business, you have to be a licensed moneylender by the relevant government authority.
Before venturing into this business, you have to understand what you can and cannot do to get back the money owed you. There are situations where/when borrowers might not want to repay loans. In this case a licensed moneylender can institute an action in Court to recover the principal loan including the accrued interests.
On the other hand, a court action cannot be instituted by an unlicensed moneylender in a case of a borrower’s refusal to pay back the loan and/or the interest on the loaned sum. The only step he can take is to stand as an individual in court to get back the actual money borrowed but would have to forfeit the accrued interest on the loan.
Procedure for Obtaining License
To obtain your license for starting a loan business in Nigeria, please, visit any Magistrate Court in Nigeria having jurisdiction in the area you want to run the business, then apply with the following supporting documents:
- A cover letter addressed to the Chief Magistrate on your Company’s letterhead.
- Certified True Copy of CAC Form 2.
- Certified True Copy of CAC Form 7.
- Memorandum and Articles of Association of the Company.
- Certificate of Incorporation.
- Tax Clearance of the Applicant.
- Police Clearance from the Commissioner of Police.
- Evidence of Maintenance of current account with a licensed Bank.
After your application and the supporting documents have been reviewed and vetted by the office of the Chief Magistrate, a Letter and Forms B and C will be issued to you.
Please note that the objects in your Company’s Memorandum of Association must be clearly stated as a financial service or money lending business. Also, N20, 000,000 (Twenty Million Naira) is the minimum share capital required.
Upon getting the necessary Court documents, proceed to the Ministry of Home Affairs and Tourism to apply with the under-listed accompanying documents.
- Application letter.
- Money Lender Ordinance [Form B] 1938 – from Magistrate Court.
- Duly completed Form C- from Magistrate Court.
- Police Report from Commissioner of Police showing- fingerprints of individual Applicants/Directors/ Proprietors/.
- 3-year Tax Clearance Certificate, [including current year] / Development Levy for each individual Applicant/ Director/ Proprietor.
- Pay as You Earn [PAYE] Certificate, Tax Clearance of at least two (2) of its directors, and evidence of payment of Company taxes.
- Copy of Certificate of Incorporation and CTCs of Forms CAC 2 & 7.
- Evidence of payment of Application fees.
- Evidence of maintenance of a bank account with a licensed bank.
The government officials would visit the intended office where you wish to or currently operate from for physical inspection. This is the final stage. During this visitation, your records will be inspected if your company had already been running for a while unlicensed, engaging in the business of money lending. Else, only the office premises and officers would be inspected. If this activity goes well and the officials are satisfied with the compliance of the office with the perquisite statutory requirements, the Money Lending License Certificate would then be issued to you or your company.
Tips for Running a Successful Loan Business in Nigeria
If you’re planning on starting a money lending company: Here’s a list of the things you need to keep in mind
- Charge interest rates that are appropriate to the risks involved in the loan;
- It is always good to start with a small market to be competitive;
- Confirm the credibility of your client from two to three sources before engaging them;
- Make sure to check your customer’s insurance especially in the case of big loan amounts;
- Maintain a professional office space; keep it clean.
- Keeping a friendly environment can help show your clients that they can trust you;
- Make sure to keep adequate documents of every detail of your loan; and when the time is right – you can expand;
- Avoid creating artificial geographical limits for your company
Money is an essential commodity for every human and it is always in constant demand. After getting some money, people tend to need more money no matter how much they have because human needs are insatiable; as humans, we always need more. We need money to start off a business, to take care of bills, to buy ourselves luxuries, even to pay off loans. These necessities of life make people seek out loans on a consistent basis and this is where the money lending business comes in.
Having explained what is involved in the business of money lending above, you should be able to start and successfully manage a loan business in Nigeria any time from now. I carefully explained the processes to follow if you want to start a money lending business.
It is worthy to note that money lending business can be risky and also involves a large amount of work just like most financial businesses out there. However, having a good business plan with adequate knowledge of the industry, operating a loan business can turn out to be a very profitable business to do.
In case you are looking for a reliable company to get funding to start your loan business, you should try Sumotrust. The company is reliable, tested and trusted when it comes to supporting businesses to attain great heights in Nigeria and beyond.