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How To Start A Finance Company

Start a finance company

If you want to know how to start a finance company, it’s important that you pay attention to regulations and are able to plan your business carefully.

The essential steps to starting a finance company are, working out your niche, conducting market research, creating a business plan, setting up your legal structure for the business, getting registered with the FCA and relevant licences and insurance policies, hiring staff and promoting your services.

With the right approach and mindset, you can build a successful finance business even with a small amount of initial capital.

In this article, we will cover every step needed to start a finance company. We will also talk about how to choose a suitable niche, as well as how to promote the new finance business.

The best way to begin your finance company

Every new company needs a few things; capital, time to invest in setting IT up and an understanding of the target market you’re looking to appeal to.

The finance industry is a regulated one, so it’s important that you understand your obligations to your customers and what you legally need to do. The best way to get started is to come up with a business plan that will allow you to carefully consider each element of your business. From budgeting, to marketing, to growth strategies, having a plan is a great way to stay on track.

Once you have a plan, you can start to put the wheels in motion.

What is a finance company?

A finance company is an organisation that provides financing and lending services to individuals and businesses in need of capital. In contrast to banks, they don’t tend to accept incoming deposits from customers.

The key elements of a finance company are:

  • Customer lending: This could be money for cars, home improvements, education, business growth, personal expenses and more.
  • Commercial lending: Financing can also be offered to businesses for things like equipment.
  • Sales financing: Some companies offer finance plans that help end customers to buy high value goods. These repayment plans can be sold to the customer through retailers, dealers and manufacturers.
  • Mortgage lending: Lending money for people to buy property falls under mortgage lending.
  • Credit cards: Finance companies can issue credit cards and credit accounts.

Finance companies can get their funds from many sources including issuing long-term securities, borrowing from other financial institutions and selling commercial paper.

When finance is issued in any form, it must be repaid to the lender over an agreed time period and usually with the addition of interest payments.

Types of finance company

Finance companies come in shapes and forms that appeal to different customers. While the first type serves mostly individuals, the second one targets principally commercial markets but some companies also extend their loan programs to both industries.

Individuals are eligible for personal loans. As the name suggests, personal loan is the type of loan which an individual frequently utilises for a personal purpose. People borrow personal loans for:

  •  debt consolidation,
  •  building or renovating their house,
  •  the purchase of a vehicle.

Loans taken for business purposes are called commercial loans. These loans, equally advantageous, can support new companies in their startup phase or help established companies to further their growth or repay debts owed.

  • expand the business
  • allow them to grow into new markets or,
  • create new product lines.

8 steps to starting your finance company

The following steps provide an easy to follow process for setting up a finance company.

Determine your niche and services 

As outlined above, there are lots of different types of finance that your company can offer. You need to decide which avenue you will focus on. Will you work with businesses, individuals or both?

You can also choose an industry to capitalise on too. Will you offer finance to automotive sectors, design, mortgages? The choices are endless.

Our advice to you is to pick a specialty which you know well as you will likely already be familiar with your target market and therefore have a head start when it comes to understanding the needs and wants of your potential clients.

As we mentioned earlier, concentrating on a particular group of people lets you aim your marketing in a specific way. Instead of trying to reach everyone, you will understand your ideal customer really well. This helps your marketing be more tailored for that specific group. Doing this gives your promotions a better chance of being successful.

Research is a key part of the business planning phase. You should research your target audience to understand if it’s the right fit for the services / products that you’re offering. Is the market big enough, what are you competitors doing? Consider surveys and focus groups for valuable market research to help identify gaps in the market.

Develop your business plan

A detailed business plan that includes your market analysis, services, target customers, financial projections and marketing strategies will act as the blueprint for your business activities.

A key part of the business plan is working out your budgets and financial projections. Knowing how much you need to invest to give your business the best chance of succeeding is important as well as having a handle on start-up costs and on-going running costs.

When you know these numbers, you can start to work out how much you need to charge per transaction to break-even and turn a profit.

Determine your legal structure

You can choose from sole traders, partnerships, limited companies. The most common type of structure for a finance organisation will be a limited company as this limits your personal liability. You can work with a solicitor or business advisor to find the best business structure for you and your needs.

As part of this task, you will need to come up with a company name. This can be anything that you want, but it makes sense to try and convey your services to people through the name if possible.  Make sure it is distinct enough as you will also want to use it to get a domain for your website. After finalising a name, check for its availability with Companies House. You must make sure that it is not already being used by others..

Once you’ve decided, you need to register with Companies House. This is where your business name, activities and important information about the company ownership will be listed. Listing with Companies House is a formal part of setting up your business.

Get FCA authorisation

No finance company can operate in the UK without FCA authorisation for the regulated activities it will conduct. This process can take up to six months, so don’t leave it till the last minute, and be prepared for a wait. According to the Financial Services and Markets Act(FSMA) 2000, all financial activities must be regulated by the FCA. Visit their website to check the latest fees involved in registration.

Sort out Licences, Permits & Insurance

You need to understand the risks and liabilities that you will face working as a finance provider and take steps to protect your business with relevant insurance. You should ensure that you have professional indemnity and errors & omissions insurance as a minimum to protect yourself against claims of negligence being made by clients.

Errors and Omissions (E&O) insurance is a special type of indemnity insurance intended for financial companies. It protects the company against claims such as work negligence. Some regulators may ask for you to have this special insurance before you start trading.

Set Up Your Business

Once the paperwork surrounding setting up and registering has been taken care of, it’s time to focus on where you will conduct your business. You may need to source a business premise like an office, or you may decide to run the business online only. The benefit of the latter being that you do not have to worry about accommodation and utility overheads for your company. You may decide to start this way initially and as you take on employees, you might want to move into purpose built offices.

Establish your company procedures

Once set up, you should have a comprehensive employee handbook and set up policies that govern the behaviour of your staff and the expectations you have of them during work activities. This can cover anti-money laundering, data protection, and fair treatment of customers.

Market Your Services

When you have your company structure and set up in place, it’s time to develop your brand identity and spread the work about your business. Build a website, marketing materials and promotion strategies that appeal to your target audience.

There are plenty of regulatory steps involved in starting a finance company but for those determined business owners with proper planning and guidance, you can succeed.

Related questions

How do finance companies make money?

Finance companies lend money to individuals and businesses. The borrowers pay it back in monthly installations over a given set of time. They also pay some extra money called interest, which is how finance companies generate their profits.

How much does it cost to start a finance company?

You need to have enough funds to lend money to customers. You can start small, offering small loans to individuals. Over time, once your business starts blooming, with the accumulated interest, you can increase the loan amount to generate more profits.

What legal obligations are there for finance companies?

Finance is a regulated industry in the UK and as a business, there are always certain obligations that you must meet. For example:

  • You must register with the FCA (financial conduct authority) if offering consumer credit lending.
  • The Consumer Credit Act 1974 regulates consumer credit agreements and helps to maintain fairness in lending practices.
  • The Financial Services and Markets Act 2000 (FSMA) sets out the regulatory framework for financial services in the UK. It’s a rule book for consumer protection, conduct and anti-money laundering.
  • The Data Protection Act 2018 must be complied with when handling personal data for customers and employees.
  • Money Laundering Regulations 2017 aim to set the requirements that mean finance companies need to have anti-money laundering policies, procedures and controls in place.
  • The Equality Act 2010 ensures that companies don’t discriminate against customers or employees based on protected characteristics like age, gender, race, sexual orientation and more.
  • Under the Unfair Terms in Consumer Contracts Regulations 1999, you are now allowed to use unfair terms in contracts issued to your customers.
  • You have reporting obligations to the FCA and HMRC. As well as your business accounts, you will need to submit complaints information and any changes in control of the management team.

It’s fair to say that the legal requirements for finance companies in the UK are complex and this isn’t a business area that should be entered into lightly without taking specialist advice.

Finally,

Starting a finance company is a challenging thing to do but with the right guidance, regulations and planning it can be rewarding. As outlined above, you need a solid understanding of your target market, access to capital, a great business plan and make sure that all legal and regulatory procedures and laws are followed.

As a highly regulated industry, it’s important to make sure that you have the right processes, permits and insurance in place to protect both yourself and your customers. With the right mindset, responsible business practices and perseverance, you can find your niche in this exciting industry.

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