How to Start a Microlending Company (2024)

Microlenders offer loans to small businesses and individuals who are otherwise unable to obtain such funding. These types of loans can offer serious help to small businesses without access to credit or individuals who are socially marginalized, geographically isolated, or lack a good credit history.

A microlending company may operate in one of two ways: The company itself might provide the capital needed to fund the loans - either from investors or by fundraising or soliciting donations - and then distribute these funds to approved borrowers. The company may also operate in a way that directly matches borrowers with online lenders or individuals wanting to make personal loans with their own money.

It's easy to see why prospective borrowers would seek the services of a microlending company, but lenders and investors are attracted to these companies, as well. Microlending companies make money from the loans when they are paid back with interest. For example, a $500 short-term loan might come with a 10% interest rate. At the end of a year, the borrower would need to repay $500 + 10% of $500 = $500 + $50 = $550, meaning that the lending company would make a profit of $50.

Whatever approach you plan on taking to launch your microlending company, the information you need to get started is outlined in this article. Keep reading to learn how to plan for your new microlending company, take care of the legalities, and become a new business owner.

Background Required to Start a Microlending Company

While there is no particular education or background requirement needed to start a microlending company, certain educational and work experiences will help you become more successful. For example, an associate or bachelor's degree in finance or business can provide the background knowledge of how to handle loan processes.

Previous experience in the finance or lending industries is a big plus because it will have provided first-hand experience in how companies handle lending. At a minimum, you should be well-versed in lending and underwriting, as well as all of the applicable laws regarding loans at the national, state, and local levels.

Laying the Groundwork for Your Microlending Company

The first thing you need to do is lay the groundwork. This means engaging in the planning required to understand how your business will be organized and how you will run it. Items to consider during the planning process include the following:

  • Your borrowers: Who are your prospective borrowers? Will you lend to small businesses in the U.S. or globally? Will you lend to individuals? What is your target audience when it comes to lending? Will you need to check credit scores or financial statements?
  • Your capital: In addition to identifying who will borrow money, you will also need to identify where that money will come from. Will you use a pool of startup funds or will you regularly solicit investors or peer-to-peer lenders? What are your needs for working capital?
  • A description of your services: Take time to draft a description of exactly what service you offer. For example, you may want to include who you plan on lending to, how prospective borrowers will qualify, what loan amounts you will offer, what your financing options and repayment terms are, and so on.
  • Interest rates: Because your lending business needs to make money, you need to charge interest on the loans you offer. Develop a method for determining loan interest rates based on borrowers' financial history, the size of the loan, and the repayment period, as well as your company's overhead, expenses, and desired profit. Higher interest rates are best for high-risk borrowers and lower interest rates for low-risk borrowers, but there may be state and federal limits to what you can charge.
  • Lending capacity: You will need to determine how much you can lend at any given time. This might be a fixed amount based on your startup capital or you might develop rules for determining how much to lend at once based on fluctuating finances. You should also consider the number of loans you want to service at a given time since that will affect your workload.
  • Your business expenses: Estimate how much money you need to get started along with how much you will need to keep running.
  • Borrower agreements: When you lend money, the borrowers will need to sign an agreement with you describing how to repay the funds. You will need to draft your own borrower agreement or find templates that you can modify.
  • Lending practices and laws: Make sure you are familiar with federal, state, and local lending laws pertaining to money lending so that your company maintains compliance and you avoid potential litigation.
  • Business plan: Draft a business plan to help clarify your goals and how you will go about running your company. Business plans help you focus on important business details and are vital if you will be seeking funding from investors.

Legalities, Marketing, and Getting Started

After you're done with the basic planning, it's time to tackle legal paperwork, marketing, and prepare to open your doors (and keep them open). The sections below provide details.

Legal Paperwork

The exact paperwork needed to legally form your company varies based on which state and city you live in. Local information can often be found on your secretary of state's website, which often contains links to business registration requirements, documents, and instructions. The below list describes the typical process:

  • Decide on a business structure. Business structure options include sole proprietorship, partnership, limited liability company (LLC), corporation, or S corporation. Each structure comes with different requirements and tax obligations. If the primary goal of your loan program is helping others, you might want to register as a nonprofit corporation. Note that the designation you choose may put a limit on which types of investors can invest in your company. Take some time to research the implications of each structure so that you can make an informed choice.
  • Choose a business name. If you will be running your company using any name other than your personal legal name, you will need to register the name when you register your business. Often, your secretary of state's business website will have a searchable database of business names currently in use so that you can make sure the name you choose is unique.
  • Complete your registration. This often involves filling out a few forms either electronically or by mail and paying a fee. Make sure you complete all required paperwork as per the guidelines for your local area.
  • Research local regulations. Laws vary depending on where you live. If you haven't already, look up all laws related to lending and running a business in your area. Some cities require that you obtain a permit or a business license, while others may have no additional requirements at all.
  • Open a business bank account. Shop around your local credit unions or financial institutions to see what they offer in the way of a business bank account. Opening an account for your microlending business is important. You may wish to make separate accounts for your business operations and for your lending. (Having a business bank account can also help you get business credit cards or other business lines of credit.)
  • Research tax obligations. If needed, you can easily obtain an employer identification number (EIN) from the Internal Revenue Service (IRS) via its website. Look into state, federal, and local tax requirements for businesses like yours, as well, so you can plan for taxes accordingly.


After all of the legalities and paperwork are taken care of, you can turn your attention toward finding prospective borrowers (and lenders, if you are pairing borrowers with lenders). Marketing plans can look different for every company but the following are a few ideas to get you started:

  • Website: Not only is it a good idea to have an online landing page where prospective borrowers can find you but you may also want to include features that enable borrowers to apply online or download paperwork.
  • Social media: Creating a page for your company on multiple social media platforms can help you connect with more people.
  • Branding: Hire a designer to help create a logo for your company. Branding helps customers recognize you more easily and helps your business appear more professional.
  • Advertisem*nts: Consider advertising your services through social media, newspapers, radio, and more. If you plan on lending to customers across the country or around the globe, you might choose to purchase online ads that will reach your target audience.
  • Cold-calling (or emailing): You can directly contact prospective borrowers and lenders with a phone call or email. If they are local, you might even stop by in person and leave a business card. Consider connecting with your local Small Business Administration (SBA) if you plan on offering small business loans.
  • Reviews: When you've handled your first few happy customers, ask them to leave you a review online or provide you with a quote describing their experience. Many prospective customers make their decisions as to which company to work with based on the reviews of others.

Open Your Doors (and Keep Them Open)

Before opening your doors, make sure you have everything in place that you will need for day-to-day operations. For example, you need to have the loan application process sorted out, templates for any required paperwork, and a way to handle your company's cash flow.

Skynova makes it easy to customize template forms for a variety of purposes. We also offer all-in-one accounting software designed for small businesses. Once you have all of the products in place that you need to get started, you can open your doors with confidence and begin matching borrowers with the funds they need.

Let Skynova Help You Succeed in Your Business Ventures

Starting a new company can feel overwhelming but proper planning and preparation will help your microlending business find success. The good news is that you get to be your own boss. The bad news is that there's bookkeeping.

Skynova offers many software products designed to help entrepreneurs like you with bookkeeping and billing so that you can devote more time to your customers.

How to Start a Microlending Company (2024)


How do I start a microfinance organization? ›

How to Start Micro Finance Company | 9 Easy Steps
  1. Step 1: Conduct Market Research. ...
  2. Step 2: Develop a Business Plan. ...
  3. Step 3: Obtain Company Registration Online. ...
  4. Step 4: Obtain Licenses and Permits. ...
  5. Step 5: Set Up Your Office and Infrastructure. ...
  6. Step 6: Develop Your Product and Service Offerings.

Is it high risk to start a micro loan business? ›

One of the biggest risks is that you could end up paying more in interest and fees than you would with a traditional loan. This is because micro loans typically have higher interest rates than traditional loans. Another risk is that you could end up in a cycle of debt if you can't repay your loan on time.

Is microlending risky? ›

Additionally, microloans frequently require businesses to put up some form of collateral or personal guarantee. This can be a dangerous proposition for business owners, as they risk losing personal assets if they are unable to repay the loan.

Is micro lending profitable? ›

Microlending is a good investment for some investors. It is a way to further diversify your income, and microloans generate cash flow returns. Microloans can often have higher rates of returns compared to other fixed-income investments.

What is the minimum capital for microfinance? ›

Microfinance Company Registration as an NBFC

To form a private company, at least 2 members and a capital of Rs 1 lakh is required. To form a public company, at least 7 members are required. Raise capital: The subsequent step is to raise the required minimum net owned funds of Rs 5 crore.

What is the minimum capital requirement for microfinance? ›

No Minimum Capital Requirement: Unlike other financial institutions, there is no mandate for a minimum capital investment of Rs. 5 crores, making it more accessible for entities to start microfinance operations.

What are the disadvantages of micro loans? ›

There are some cons regarding microcredit, including too much pressure to repay loans, a large suicide rate among borrowers, and severe debt levels. A contributing factor to the disadvantages is the high interest rates on some microcredit loans – rates can be 30% or even higher.

Are SBA microloans easy to get? ›

The funds are given out by nonprofit community-based lenders. Each microloan lender determines borrower eligibility. 13 If a small business needs a smaller amount of money, then a microloan may be the easiest type of SBA loan to get.

Do micro loans require collateral? ›

Microlenders typically offer more flexible terms. For example, a microlender may be able to finance your business based on a business plan and your projections for cash flow. They often require some form of collateral, however, as well as the personal guarantee of the business owner.

Why is microlending bad? ›

One basic issue with lending to extremely poor people is the cost: Because the loans are often small (averaging a few hundred dollars), the overhead costs are higher as a proportion of the loan, and it's harder to make lending profitable. Another problem is predicting who will repay a loan.

What is a real life example of microlending? ›

Microlending Example

Let's say a small business owner needs $1,000 to repair equipment for her bakery. She doesn't think she'll be able to secure financing through a traditional bank and instead opts to use a microlending company.

What is the interest rate for microlending? ›

How do I pay back my microloan?
  • Interest rates vary depending on the intermediary lender.
  • Generally, between 8%-13%

What are the 5 C's of lending? ›

The five C's, or characteristics, of credit — character, capacity, capital, conditions and collateral — are a framework used by many lenders to evaluate potential small-business borrowers.

What is the fastest growing microfinance company? ›

Chaitanya is one of the fastest growing microfinance Companies in India. With an aim to create a profound impact on society through its microcredit services, Chaitanya is rapidly expanding its operations.

Is it hard to start a money lending business? ›

But, starting a lending business can be a complex endeavor. You need to navigate legal requirements, develop a sound business plan, choose the right lending model, and identify effective marketing strategies.

Is microfinance good for the poor? ›

Research funded by The World Bank examined the impact of three microfinance institutions in Bangladesh over a seven-year period and found dramatic decreases in overall poverty, with the highest impact on those families in extreme poverty.

Who invests in microfinance? ›

The industry now attracts a growing numbers of individual and institutional investors. The great majority of these participate via professionally managed microfinance funds that channel money (often in the form of equity or loans) to microfinance institutions (MFIs).

What is a micro lending company? ›

Microloan lenders are organizations that lend out small amounts of money, typically in the range of $5,000 to $50,000, to entrepreneurs who can't secure working capital from more traditional financial institutions or credit cards.

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