By: Jer Trihouse. I received a call this morning from John. John wants to start a payday loan business. More specifically he wants to open a consumer loan business. He’s been researching the payday loan industry for 6 months. John’s question, “Should I buy a franchise? Or, should I start an online payday loan business? Do I really have to stick it to folks; charge the hell out of them in fees? Am I too late? What about a car title loan business? I have a $100,000 CD in my bank making no money! Can I put my money to work with an operator? How much can I get if I do? Do I need a license? Are these things REALLY profitable? I see them everywhere!”
NOTE: In my discussion below, payday loan businesses include all business to consumer – B2C – loan products. This means brick and mortar, internet and smartphone originated, short term [typically 14 days to 18 months] extremely expensive [100% APR’s at a MINIMUM ranging from $10 per $100 loaned to $35+ per $100 loaned for 14 days] small dollar [generally $100 to $1000] non-collateralized loans made to the approximate 50% of the USA demographic unable to get their hands on $400 CASH in an emergency.
If you are new to “the business of lending money to the masses profitably,” it’s likely you don’t know what a pathetic situation the typical household is in:
- 42% of consumers say they do not have enough savings to cover at least three months of living expenses.
- 47% of consumers say their spending equals or exceeds their income
- 55% – more than half of consumers (138 million people) – are just “financially coping.” These individuals are struggling with some aspects of their financial lives.
- Half of all consumers cannot get their hands on $400 cash when the car suddenly breaks down, the utility bill is due, a prescription needs filling…
- This sucks! Life in the USA should not be like this!! This situation needs fixing!!! I can’t fix it. You can’t fix it. WE CAN FIX IT!!! But that’s another Post!!!!
- Hard to grasp, right? Here’s a link to just one of the hundreds of studies: Center for Financial Innovation
Here’s a link to a real consumer’s story and how she got $300 deposited on her Wells Fargo debit card using her phone on a Sunday within 120 seconds! Tiffany’s Story
So, here’s a list of the financial products that appeal to average folks who need cash immediately:
- Payday loans [single-payment, principal and fees due on consumer’s next payday]
- Car title loans [These loans are collateralized by the title to the car, truck, RV…]
- Installment loans
- Line-of-credit loans
- I’m not referring to business to business loans, merchant cash advances, factoring, etc.
- Additionally, I’m not covering check cashing stores. Check cashing is an extremely low margin business with a LOT of headaches. [Cash on the premises, face-to-face transactions, employee theft, owners must secure an MSB [Money Service Business] license from the FED’s…
Payday Loan Franchises, Stores, Internet…? Buy Cheap & Build?
This particular payday loan franchise company requires John to have about $215,000 to open. This consists of a $35,000 one-time franchise fee, $65,000 for build-out, $15,000 for software, signage and miscellaneous marketing materials. This leaves roughly $100,000 “for the street.”
Finally, a 6% monthly commission must be paid to the Franchisor on the gross revenue of the business. That’s 6% on the gross revenue! As John explained this to me, the Franchisor has a system for payday loans – nothing else. That means, if John develops a scrap gold buying business or if John adds car title loans or anything else for that matter, he must pay 6% on his total gross revenue; this despite the fact that the Franchisor offers zero support and expertise for these additional services.
This Franchisor cannot guarantee a specific return, but they imply John will earn 18%/month EBITDA. (This using a licensing model allowing 15% of the face amount of the loan to the consumer.) Of course, as in life, this potential return depends on a lot of factors. There are no guarantees.
So… should John purchase a franchise? With zero hesitation, I responded to John with an emphatic, “NO.”
BUT, I began to listen to the path John was on. I sensed the frustration John was experiencing. AND I sensed the answer to his initial question requires a macro perspective rather than a simple yes or no to, “Should I buy a payday loan franchise?”
For the past 6 months, John has used Google.com for keyword searches like, “how to start a payday loan business, payday loan software, payday loan industry, payday loan customer demographics, payday loan lawyer” and on and on…
He’s called and participated in demos of various payday loan software vendors such as SparkLMS, eChecktrack, Answers, Epic, Azo Blue, Infinity, Alpha Omega, IntroXL, TranDot, eCash, EData and more.
Additionally, John has reached out to legal counsel including Paul Soter, Claudia Calaway, Hillary Miller… to discuss compliance, consumer contracts, arbitration agreements, licensing models (choice-of-law, state-by-state, offshore)… This led John to Allen Parker and the tribe model (a sovereign nation) and the Texas CAB/CSO licensing model.
John talked with the consumer data scrubbers; Clarity, DataX, CoreLogic-Teletrack, Idology, Microbilt, Factor Trust, and more.
And of course, John contacted a few ACH providers like Advantage, LST, ACH Works… and the new payday loan”wire transfer” provider introduced at OLA. ($3.00 wire transfers using the EFT Network rather than the ACH system. Instant, same day funding! 24/7/365. Push your loan principal immediately to consumer debit and prepaid cards!!)
Then there are the web site builders like Frank Masotti, the lead generators, the SEO and SEM companies, outsourcing of call centers vs in-house, analytics experts, collection companies, reputation management companies…
After doing all this research and reading some of our training and start-up materials, John still didn’t have clear answers to questions such as:
Is the PDL industry saturated? Is there room for another payday loan lender? Maybe I should lend capital to an existing operator? (For example, there’s a team with 50 brick-n-mortars in 3 states offering 10% returns with personal guarantees. Or, an operator in Las Vegas with 3 locations is offering 3% per month with car titles as collateral.) Or, John wonders if he should act as a 3rd party Texas Lender by making capital available backed by a CD and an Irrevocable Letter of Credit? He’s been told he can earn 15% – 24% annually on his capital with very little risk.
Should John buy an existing consumer loan business from a motivated seller and then build it with renewed enthusiasm and energy? [Read my “Buy Then Build” Post.
John has correctly determined that there is a TON of opportunity in the payday loan – micro-lending space! The puzzle for John is to figure out HOW he wants to play it based on his goals, his family situation, his existing skill set, and his appetite for risk.
So… John asks himself the following:
Internet or store or both?
Should I Launch a new consumer loan business or should I buy or build?
How do I market? Online and off-line?
How do I deal with the evolution of borrowers using their smartphone to find my consumer loan operation? Millennials are coming…
Do I focus solely on payday lending, installment loans, car title loans, cash advances…?
What other products and services make sense to add to my consumer loan business?
Do I really need to invest in a franchise system or can I do this on my own?
“I’m concerned about my family (John’s health is questionable and he has a wife and 1 child) and their ability to carry on the business should something happen to me. Would my being part of a franchise system reduce this risk and add value to my new enterprise?”
“Do I need legal counsel on retainer or can I rely on the Franchisor to keep me compliant?”
“As a Franchisee, I’ll be part of a system, a group of peers in the same industry. How valuable is this? Or, do I go on my own and rely on my state organization, FISCA, CFSA and/or OLA to educate me and help me build my business? Will I have the time and money to be part of these trade organizations?”
What do you think? What would you do? For that matter, maybe you already made the decision! What are your thoughts? What would you advise John to do? Put on your consultant hat! It’s time to give back… LEAVE A COMMENT!
Are you ready to dig in? You think you can handle the business of lending money to the masses? Face-to-face? Or, you prefer to run an internet operation? Maybe open a tiny, limited office to get your state license and scale it via the Internet?
My Team and I have done it all! Started in 1998 with a single location in Garden Grove, Calif.
We are operators. We are teachers. We are consultants. We run Boot Camps in a “live” store. Consumer loans via the Internet? We do it. Loans via smartphones? Let us show you the way. Your journey starts here: Click Here to Get our Course. Read it. Study it. Keep it near you. It’s your “Reference Guide.” Then, call me. Here’s my direct number: 702-208-6736. It’s my cell! Crazy huh? Nope. There is a method to my madness! Every day, I get to talk to operators, entrepreneurs, folks with capital they want to put to work in consumer lending without having to run the day to day operations, consumers/borrowers, vendors & platform providers offering new state of the art money transfer, loan software, analytics solutions, VC’s, Family Offices, tribe servicers, lenders with stores to sell, buyers, website builders, smartphone application loan providers… and on and on and on! I LOVE IT! I LEARN EVERY DAY.
The business of lending money to the masses will never go away. [Doubt me? Read “Debt: The First 5000 Years.”]
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