William Shakespeare once said, “Be Neither a lender nor a borrower.” However, many people ignored his advice, and as a result, non-bank loans now make up a large share of the market.
Now, before you can hunt for investors, you must first understand the stages involved in launching a firm. If you are on the lookout for a guide on how profitable is money lending business in Uganda, then you are in the right place.
Fortunately, this thorough blog will answer the question since it has all of the information you need to get started on your path to being a successful lender.
Money Lending Business
Before diving into further details, it is critical to understand the nature of the business at hand.
Businesses that lend money to people provide them with capital; often, these are people who do not qualify for the usual bank loans. Money lending companies can be formed in a variety of ways:
- You might lend your own money to individuals through a private lending institution, either unsecured or with collateral.
- You would make contacts with investors and money brokers who would offer funds for you to make loans. Borrowers would be charged a loan fee, while brokers or investors would keep the money earned.
- Peer-to-peer lending is a type of online money lending network that connects individual lenders and borrowers. The loan service is often charged by the peer-to-peer lending group.
This article post will mostly focus on money loans, which need significantly less upfront cash. However, before deciding if it’s the right step for you, take time to examine all the advantages and disadvantages of starting a money lending business.
Read also: How to Start Money Lending Business in Uganda
The Job Market
Moneylenders tend to see MFIs, SACCOs, and other moneylenders as their major competitors.
The money lending sector will eventually vanish as MFIs and other financial institutions have enhanced their capacity to give loans with faster approval periods and better terms.
Many small-scale moneylenders end up lending to riskier borrowers due to a lack of qualified clients. They complain about the difficulty in processing repayments.
Typically, these moneylenders have five to ten current loans ranging from 50,000 to 200,000 Ugandan Shillings.
Other moneylenders, who regularly lend to paid persons with higher guarantees, (not only the pay cheque, but also the fear of losing prestige and dishonor), are visibly larger, more sophisticated, and better at debt management. These moneylenders often lend between 250,000 and 500,000 shillings to clients aged 50 and up.
Requirements for Money Lending
- A company that lends money must be approved by the Uganda Microfinance Regulatory Authority (UMRA) and registered with the Uganda Registration Services Bureau (URSB), according to the Tier 4 Microfinance Institutions and Moneylenders Act, 2016.
- The money lender must collect the company’s postal and physical addresses (Form 18).
- A money lender must give a borrower a receipt for each loan repayment and keep records for 10 years.
- A borrower should sign a loan agreement and not a sales agreement.
- A money lender may not sell any collateral provided by a debtor as a pledge, sale, or collateral for a loan given to him until 60 days after the debtor has received a written demand notice asking for payment of any overdue balances on the money advance.
- A money lender may undertake an appraisal and get a forced sale value of the collateral before selling it at public auction or by private treaty to determine the property’s market worth.
- Before disposing of the collateral, the borrower is entitled to settle any overdue amounts and expenditures involved with redeeming it.
- When a money lender acquires collateral as part of a money loan agreement, the lender owes the collateral the same care and attention that a prudent owner would provide to their property.
- If a lender’s collateral is misplaced, destroyed, or damaged, then the lender will be accountable for paying the replacement value of the collateral within a reasonable time frame.
- A borrower can also get information from a money lender at any time by making a written request.
Read also: Latest Lending Companies in Uganda
Capital Investment
The first investment for starting a hard money lending business will be UGX 50,000,000. It is vital to provide prospective investors with accurate details of your company’s plan and how they will obtain a return on their investment.
Here are some of the estimated costs to start your investment:
| Specification | Cost |
| Company Registration | UGX 585,000 |
| Stamp Duty | UGX 250,000 |
| Tax Registration | UGX 240,000 |
| Application Fees | UGX 50,000 |
| Licence Fees | UGX 500,000 |
Business Profits
The money lenders often charge between 3% and 5% of the total loan amount. Based on the premise that the bulk of the loans you make would be for dwellings, an average loan size of UGX 100000 will result in an average cost of UGX 1100000 per loan.
The interest on the loans will be paid to the investors. You should aim for a profit margin of roughly 80%. This equates to how profitable is money lending business in Uganda with this margin.
Additionally, when your reputation grows, you may be able to increase that quantity to 50 loans every year.
By recruiting personnel and renting a commercial building, your profit margin would be reduced to around 40% at this time. As a result, the yearly revenue would net you a tidy and huge profit.
Business Idea
Now that you are aware of the major prerequisites for creating a money lending firm, you should modify your business idea to compete in the market.
However, even though you already know your product, conducting market research will give you an added advantage.
Market research is essential because it may help you gain a better knowledge of your target market, competitors, and the condition of your industry.
Therefore, take time to compare the offers, pricing, and client testimonials of local money loan providers online. Why? Because you want to close a market gap.
You can also take advantage of the fact that the location you are exploring lacks a moneylender or microlender who can provide a company credit line.
Charges for Money Lending
Many of the money lenders often charge between 3% and 5% of the total loan amount. The interest on the loans will be paid to the investors.
However, your maximum interest rates will affect the interest rates you charge. Therefore, after determining your costs, you may calculate your markup and ultimate pricing points.
Remember that the prices you use as an investment might be subject to changes if the market requires it.
Target Market
In general, your target market will be any borrower with bad credit. Along with Facebook, Instagram, TikTok, and LinkedIn, you should promote these sites and utilize them to engage with potential investors.
Read also: Money Lending Marketing Plan in Uganda
Business Venue
In the money lending business, you could choose to start it from home to save money in the beginning.
However, if your company grows, you will most likely need to hire staff for a range of jobs and may even need to rent an office space.
The following details may help you choose a company space:
- Excellent location that is easily accessible by public transit.
- spacious, well-ventilated, and naturally illuminated.
- Adaptable lease that may be renewed as your company grows.
- A space that is ready to use and does not require any repairs or alterations.
Business Name
Your company name acts as your brand, so choose a name that explicitly summarises your aims, products, and mission.
It is also important to note that word-of-mouth referrals will account for a big portion of your plan, particularly at the beginning of your business. Therefore, you should select a name that is brief and easy to remember.
Additionally, choose a name from those that passed the screening procedure of its availability and proceed with creating social media profiles and registering domains. Your company’s name is one of the major differentiators that sets it apart.
Once you have decided on a company name and started the branding process, it will be very difficult to change it. Therefore, it is critical to think carefully before concluding on a specific name.
Business Plan
Every business needs a plan. This will act as a guide to assist your company in getting through the launch period while maintaining focus on your main goals.
A business plan also assists prospective investors and partners in understanding your company and its intended goals.
Business Registration
It has long been common for uninformed consumers to lose property due to nonpayment of loans from unlicensed moneylenders who demand high-interest rates.
Anyone interested in working in the money lending sector must now apply to the Uganda Microfinance Regulatory Authority (UMRA).
Furthermore, the authority may opt to do due diligence on the directors and other persons who will be involved in the operation of the organization.
Business Structure
With a variety of choices in the types of business entities, choose the legal form of your money lending firm carefully since it will affect your personal and business registration requirements, taxes, and duties.
Here are the main business structures:
- The sole proprietorship blurs the distinction between individual and corporate law. The owner gets all earnings and also bears all of the company’s duties, liabilities, and losses.
- The general partnership also involves two or more people. This means that the owners are responsible for both liability and profit.
Additionally, the partners pay taxes on their percentages of the business’s income on their tax returns.
- A Limited Liability Company (LLC) combines all the benefits of partnerships and sole proprietorships with all the benefits of corporations. However, the debts are not the owners’ responsibility.
- A C-corporation is considered as a separate legal entity under this structure, and its liabilities are not personally due by the owner or owners.
Owners get earnings as dividends to shareholders rather than directly. When owners pay taxes on their dividends in addition to the corporation, this is known as double taxation.
- An S-Corporation is not a legal commercial organization; rather, it refers to the company’s tax classification. To achieve the desired tax status, an LLC or corporation may seek to become an S-Corp.
Profits in an S-Corp are promptly distributed to shareholders, who subsequently file personal tax returns and pay taxes on their percentage of the company’s profits.
Bank Account
You must first register a bank account to save your investments before you can begin earning money.
Separating your company and personal accounts makes tax filing and revenue monitoring easier. Also, note that opening a corporate bank account is similar to opening a personal one.
While banks provide several services, it is critical to analyze your alternatives and choose the plan that best matches your company’s needs.
Final Thoughts
Money lenders make up a large business environment because they provide a valuable service to folks who are unable to get loans.
If you can build trustworthy contacts with investors and have a big humanitarian heart, you may start a thriving lending company right at home.
Now that you understand the whole process on how profitable is money lending business in Uganda, it is time to launch your prosperous money lending firm.
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