Unemployed but ready to start a lending agency - How to get started

QUESTION: I am currently unemployed. It has not been easy finding another job given the state of the job market. So here is my question: I have some money sitting in the bank, and with today's interest rates I must say, it is not working for me at all.

I have thought about the stock market, but these are not funds I want tied up for too long. I have been observing a friend who borrows money from lending agencies at some ridiculous interest rates, which she says a lot of her work colleagues also do, so it got me wondering, how can I go about starting a small lending agency?

I ran the idea by her and she passed it on to her colleagues and already, she has been getting requests because they thought it was something already in operation. I know that unsecured loans are a big risk, so that's why I am only interested in a small group of mutual associates for right now. I am willing to charge a more competitive rate by cutting out the excessive administration fee, and to not have my loans go beyond one year with a maximum loan of say, $100,000.

Do you think this is feasible, and if so, what do I need to do to minimise, my risk and ensure collections like, for instance, requiring payment by standing orders? The clientele is not an issue. I already have them lining up.

- N. White

PFA: You are taking a positive approach to dealing with your employment situation. Up to now, you seem to have a preference for preserving your principal and generating a safe cash flow, seem able to spot a business opportunity, and to move with confidence to seize it.

I agree that the stock market is not the right thing for you in your present circumstances for the reason you have given, and for the risk it would expose you to. But is a lending agency the best thing for you now? You have some funds, believe you have a clientele, have a marketing agent, and have some understanding of financial matters.

I can understand why you are initially interested in persons known by you or your friend, and why you would want to eliminate the administration fee, but I suggest you take a closer look at matters.

I cannot say your potential borrowers are compulsive borrowers, but it seems that they depend on other people's money to maintain their lifestyle. And do you know how well friendship and business mix, particularly when it involves the lending of money?

Financial institutions are experiencing high delinquency rates. Do you know the track record of your potential customers? You do understand the direct relationship between risk and return and want to give yourself a competitive edge by not charging administrative fees. If the experience of small lending agencies is anything to go by, it seems, especially as your business grows, that your administration expenses would be formidable due to the fact that such businesses tend to have many small, short-term accounts.

I suggest that you set up and register a formal business if you really want to proceed with your plans. Make sure it is adequately capitalised. Consult the Companies Office of Jamaica about setting up your business if you need help.

The Money-Lending Act addresses issues germane to the type of business you have in mind. It addresses the required conduct of such businesses, the forms of contracts that are enforceable, the treatment of loans in default, legal recourse to borrowers in the event of excessive rates, and the make-up of documents relative to each transaction. See the following web site for further information:www.moj.gov.jm under the section, Laws of Jamaica.

In the money-lending business, the following information is usually required to assist in verifying identity and screening potential borrowers: a job letter, TRN, photo identification, pay slips, passport-size photographs, and a requirement for a minimum number of years in employment. There are usually collateral and guarantor requirements. But I see that you prefer to give unsecured loans.

Money lenders tend to accept payment by way of salary deductions from "approved" employers, or through commercial banks if salaries are credited to accounts held with them. A standing order, being an arrangement by which a financial institution pays a set amount to a named beneficiary, at a set interval for a specific period, or until cancelled, on the instructions of its customer only makes sense if sufficient funds are in the account when payment is due.

If you decide to proceed after you have done your feasibility study, be formal, and pay attention to the quality of the line, not its length.

Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of "The Handbook of Personal Financial Planning", offers free counsel and advice on personal financial planning.Email: finviser.jm@gmail.com