Starting a finance company is much like starting a company of any other kind, but you’ll quickly find that the many financial regulatory requirements will take up the bulk of your time learning the niche. Nonetheless, the potential for a successful finance business is so high that even with little startup capital, so long as you’re willing to put in the work learning the craft, you can make a success of your business. Real Business has put together this guide to help prospective finance company owners find their steps.
From what a finance company is, to the many regulatory requirements binding them, this article will detail all you need to know to get you started.
Table of Contents
What Is A Finance Company?
A finance company is a type of financial institution that specialises in both lending loans and credit, providing a means of accessing resources or services they couldn’t otherwise afford. Two main types include:
- Consumer Finance Company – This type of finance company lends through personal loans, auto loans etc. to individual consumers. These can be for reasons that are both practical and luxurious.
- Commercial Finance Company – This type of finance company lends loans that are usually strictly productive, such as equipment loans and capital loans.
The key elements of these financial institutions are:
- Specialised Lending – Most finance companies focus on specific loans, such as personal loans, targeting a specific audience and increasing their expertise in the market.
- Higher interest rates – A finance company is going to make their money from interest rates, and usually these rates are higher than those in traditional banks.
- Alternative financing – There are entire pools of rejected loan-seekers who seek an alternative from the banks, and the flexibility of a finance business can cater to them perfectly.
- Risk assessment – There are elements of risk management in all lending businesses, and those that are best at this skill tend to be employed at finance companies, their skill wasted in abiding by the strict guidelines that banks do.
- Diverse servicing – Insurance coverage, debt financing and consolidation, and future financial planning are all skills that usually come in addition to the main goal of servicing loans.
How To Begin A Finance Company
A new company requires both startup capital and a good target market understanding. Regardless of what you do, securing business financing through bank loans, grants, or stakeholding investment is imperative to sustain your finance company.
- Financing – Regardless of what you do, securing business financing through bank loans, grants, or stakeholding investment is imperative to sustain your finance company.
- Market research – Creating a marketing strategy by researching individuals who use those services, identifying competitors and general trends by immersing yourself in communities and platforms dedicated to those industries that are happy.
- Business model – What financial services will you provide? A personal loan is very different to a business loan.
- Regulatory authorisation – The finance industry is heavily regulated, and all of them are authorised by the Financial Conduct Authority (FCA). The process of authorisation requires submitting a detailed application that demonstrates compliance with FCA regulations and meets minimum capital requirements. This can take several months. A list of regulations has been written later in the article.
- Legal structure and registration – You will need to register your business or company, determining the business structure as you do so (limited company, sole trader, etc.) You must then generate a name and register the company with the company’s house, registering for taxes with the HMRC as you do.
- Operational infrastructure – Financial institutions are usually filled with qualified staff with intense knowledge of the finance industry. Make sure you have those people at your company too.
Types Of Loans In The Finance Industry
There are several types of loans in the industry:
- Personal loan – Individuals are eligible for personal loans. As the name suggests, a 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
- Commercial Loan – Loans taken for business purposes are called commercial loans. These loans, equally advantageous, can support new companies in their startup phase and 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.
Finance companies may also use equity financing, where investors provide capital in exchange for equity in the company, making them shareholders. This involves selling ownership shares in the company to investors in exchange for capital.
8 Steps To Starting Your Finance Company
The following steps provide an easy-to-follow process for setting up a finance company.
As a financial institution, it is crucial to comply with all necessary regulations and obtain the required licenses to provide financial services to customers.
1. 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?
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.
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 your competitors doing? Consider surveys and focus groups for valuable market research to help identify gaps in the market.
2. 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 ongoing 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.
3. Determine Your Legal Structure
You can choose from sole traders, partnerships, and limited companies. The most common type of structure for a finance organisation will be a limited company as this limits your liability. You can work with a solicitor or business advisor to find the best business structure for you and your needs.
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.
4. 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.
5. 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.
6. 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 is 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.
7. 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.
8. 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 word 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.
Conclusion
Overall, a finance company is not the easiest company to create from the ground up and is rife with considerations to make. But we believe it is one of the industries with the highest potential. There will always be a need for loans. 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.
FAQ: What legal obligations are there for finance companies?
Finance is a regulated industry in the UK, and as a business, there are always certain financial regulations and obligations that you must meet:
- You must register with the FCA (financial conduct authority) if offering consumer credit lending.
- The Consumer Credit Act of 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
