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How to Start a Micro Cash Loan Business in South Africa

Do you want to start a micro cash loan business from home? If YES, here is a complete guide to starting a micro cash loan business with NO money and no experience.

Starting a Micro Cash Loan Business in south africa might be one of the most lucrative businesses to venture into. With the state of the economy experienced in South Africa, people are looking for alternative means of getting loans. This is because the usual salaries are no longer enough to meet all the responsibilities average people have to face.

And starting this type of business is relatively easy if one has the right kind of background. A business of this sort helps people gain access to money quick without all the stringent policies of a regular financial institution. The interest rates could vary since there is a ceiling on how much people can borrow while repayment duration remains within 36 months.

With the NCR regulating amounts payable by consumers, the customer may feel very comfortable to utilize any one of these micro cash loan institutions.

More and more people are looking for loans like this, despite the fact that political views may be somewhat leaning towards the negative side of unsecured loan organizations. The government and politicians will usually stay on the side that fits the best interest of her people.

Keeping vulnerable people from loan sharks and con artists is the main reason for most of the formalities it takes to establish such organization, but these rules do pay off in the long run.

There are definitely other people offering the same kind of service as you and so competition will become a major issue when thinking of entering this field. But this is the same with any other kind of business out there, so it is not exclusive to the micro loan businesses.

Anyone choosing to get into such a business would have to do a thorough feasibility study to know the possibility of making profit in such a venture. The principle of running this business is simple on the surface. Get lots of liquid cash, look for those who need loans and give them the loans at a certain interest rate.

The regular banks use other people’s monies all the time to enter into such transactions, but the difference between the regular banks and the micro finance institution is the ceiling regular banks have on their interest rate. All in all, this is a good business to go into if all the necessary things are done to ensure success.

Steps to Starting a Micro Cash Loan Business in South Africa

1. Understand the Industry

The Lending industry in South Africa has had its own share of ups and downs, but it experienced a major growth surge in the mid 1990’s to early 2000’s. People could access loans from R6000 upward and shorter than 36 months duration for payback making the demand for micro cash loans spike during this period.

The first micro loan crisis was experienced in the late 90’s when the authorities increased interest rates to allow more capital in the country. This, coupled with the weakening Rand, caused many micro financing institutions to close up.

But in 2002, a reform in the industry was achieved when the MFRC which was the seed institution of the National Credit Regulator opened the market for high interest rate loans, and made it mandatory for every micro lending organization to register with the NCR, from then on the NCR would regulate the interest rates and other key factors that play major roles in this sector.

In 2007, another financial crisis hit the industry, but was rectified again in 2010 due to large banks and other lenders entering the market with more stringent criteria for home loans and other factors, and made borrowers run into the micro loan market.

For now, the market is really stable due to these reformations and regulations so a future crisis of the industry is not likely. By Introducing the National Credit Act, strict restrictions have been placed on those desiring to start a micro loaning service and the consumers who patronize them.

This act demands full disclosure on all payable charges on the principal, including any other fees charged which must be explicitly made known to the consumer. A repayment schedule must be in the form so that the consumer has more time to think about the loan before taking it. The National Credit Regulations include the maximum rates of interests applicable to a variety of loan types.

Interest rate caps are now enforced for various credit types, lending agencies with more than 100 credit agreements or a check book of more than R500,000 without registering with the NCR may have all their loan agreements declared null and void or face financial penalties.

Factors that produce consumer indebtedness include; when lenders abuse attachment orders known as garnishee orders, and other additional charges that are levied beyond the interest rates of the loan itself. These include initiation fees and insurance charges that are mandatory for the consumer to secure a loan.

We must also consider the political perspective on the micro loan industry with many politicians stating that unsecure lending and the blacklisting of defaulters are some of the reason for high unemployment because employers seek to know the credit history of potential employees before hiring them.

Others have seen this industry as the reason for violent wage negotiations as employees demand increase in their salaries because of the debts being paid. These days, anyone with a desire to establish a micro cash loan business in South Africa can do so, as long as certain criteria are met.

The registration fee is R2000 and a branch fee of R250 is also required. The loans do not exceed R10,000 and the duration for repayment should not exceed 36 months, loans are not collected by credit cards or chequing accounts, the institution must be registered with the MFCR.

The person or persons desiring to enter into the micro cash loan business should consider certain incentives that make this endeavor worthwhile and lucrative.

2. Conduct Market Research and Feasibility Studies

  • Demographics and Psychographics

The demographics and psychographic composition of those who need the services of a micro cash loan business in South Africa extends beyond the normal sect one would originally expect. Seeing that such services were originally put in place to help the poor access loans, the spectrum of people who need these services can be extended to workers within a certain area of business.

Workers are excellent prospects for a business like this, what with the rigid salary increment and ever increasing bills, they usually find themselves in a place where they need quick loans to make ends meet.

In as much as the worker who patronizes the micro loan business can have some relief when their loans come through, the continuous refusal of the firm to increase salaries may cause for one in such a situation to seek more loans to remain afloat.

Another set of people for this type of business are those seeking to start new businesses. Usually securing initial capital for business might prove difficult due to the rigorous work it takes for entrepreneurs to convince investors for their money.

If a startup desires loans from a Micro Cash loan business, he doesn’t have to go through the stress of writing a proposal and defending it.

He simply applies for a loan like every other person, to pay interest on the principal. The Micro Cash loan business owner does not have to be concerned as to whether the business does well or not, as long as he gets the money back with the agreed interests.

Owners are also excellent prospects for the micro cash loaning business, from time to time depending on how their own businesses go, they will need some type of quick loan to secure a deal or business opportunity. Small businesses looking to expand their market size or re-brand may need such services too.

3. Decide Which Niche to Concentrate On

It is quite challenging to identify ones niche in an industry like this but certain practices can cause a particular micro cash loan business to stand out, beginning from a convenient interest rate to manageable repayment duration, to the use of the internet and online platforms to access loans.

Exciting promotional packages and give away to loyal customers may also serve as distinct practice for your own business. This will help develop a particular type of mindset in the customers, making them feel like there is more to your business than just the loan services.

The Level of Competition in the Industry

The Level of competition in the Micro Cash loan Business in South Africa is high due to the involvement of bigger institutions providing similar services to consumers across the country. Most of these financial institutions have been in the field for years and have fine-tuned their service delivery to excellence. One would have to prepare him/herself for strong competition when entering this field.

However location does not affect the competitiveness of the business as most loans can be accessed through online and digital platforms. So it doesn’t really matter where the Micro Cash Loan business is located, consumers can access their services with their mobile devices.

4. Know Your Major Competitors in the Industry

Usually, every industry has brands that have made a positive mark on consumers either by a unique approach to service delivery, customer retention or even by simply being in the industry the longest. Some of these attributes resonate positively with consumers and further facilitates committed patronage. Below are therefore some of the leading micro finance business or brands in the South Africa;

  • Micro Finance South Africa
  • African Bank
  • Capitec
  • Marang Financial Services
  • Small Enterprise Foundation
  • Free Spirit Cash Loans
  • RCS Loans
Economic Analysis

When it comes to this kind of business where you literally handle other people’s money, you ought to have done your research about the market, the business and the various challenges that comes with it.

If you are an aspiring entrepreneur, you may learn the ropes as you go, but to say the least, the Micro Financing Business is not for beginners. It is for those who have been in the financial business for a while and have come to understand the ropes, language and system of the entire business.

Getting into this business will require a large amount of money and except one is already very wealthy, one would have to solicit funds from friends, family, colleagues and investors to be able to float such an enterprise. If you do your feasibility studies well, you will be able to make profits as you go along, but be careful of scammers and fraudulent people who seek to take advantage of rookies.

5. Decide Whether to Buy a Franchise or Start from Scratch

Starting your own micro cash loan business from scratch gives you the chance to conduct thorough market survey and feasibility studies before deciding on a location to kick off your business. And this, coupled with the experience you would have gained through the process would make starting your own micro loan business from scratch advantageous for you in the long run.

It would be more advisable for one who wants to venture into such a business to have already gained some type of experience in the micro loaning industry or other financially focused industries, as this gives you a more solid foundation to go into this venture.

However, buying an already successful franchise may definitely bring immediate returns but the cost is relatively expensive even though one may begin to see profitable results earlier.

When you choose to buy an already existing franchise, one that is successful I might add, you also buy the consumers with their goodwill. Whatever costs incurred while buying the franchise can be regained in the future if business continues to go nicely.

6. Know the Possible Threats and Challenges You Will Face

Every business no matter the industry it is situated in usually has to deal with threats and challenges and the Micro Cash Loan Business segment is no different. If you decide to venture into this line of business, one threat you will face is unfavorable governmental policies.

Although such policies police fraudsters and make it difficult for them to operate, they could sometimes be a wall of hindrance to smooth business operators and should be paid attention to. Economic downturn or bad economic environments can also pose a threat. Hardly would you find any country without its own form of economic issues.

While this could be a strong threat to kicking off this type of business, the truth still remains that other micro finance institutions are still operating in spite of the economic issues; if they can weather the storm, so can you. Other threats may include other well established organizations that are offering similar services that you intend to provide.

The major way to overcome a few of these threats is to create your own market. Look into the community, find out the areas where the competition seems to be missing the mark and improve on that. But when it comes to the economic landscape of the country, all you can do is just practice optimism and hope the situation will work out in your favour.

7. Choose the Most Suitable Legal Entity (LLC, C Corp, S Corp)

There are some factors to consider before choosing a legal entity for your micro cash loan business and they include; limitation of personal liability, ease of transferability and investor’s expectations. You can start this business as a Limited Liability Company and then later on switch into a ‘C’ corporation or an ‘S’ corporation. This option is well advised if you choose to go public with your company someday.

People usually prefer a Limited Liability Company for various reasons; if not general partnership would have been the best legal entity to register your micro cash loan business especially if you are not kicking it off with huge capital. However if you intend to grow your business beyond the South African market into a more international terrain, then the Limited Liability Company is the best for you.

Limited Liability Companies are more flexible to work with, plus you will need managerial formalities like board of directors, shareholders meetings etc. to effectively direct such an entity.

8. Choose a Catchy Business Name

Creativity is at the heart of picking a name for your micro cash loan business. You may want to think of certain things when coming up with a catchy name. Maybe you want to focus on your unique edge over your competitors and use that to fuel the Business Name or you want to pay attention to the change you want to produce in your consumers.

Whatever the case may be, the name of your micro cash loan business is part of the factors to consider. If you are therefore considering what names to use when starting your own coin collection business, here are some names you should try;

  • *YourName* Micro Finance Bank, LLC
  • *YourName*and Sons Micro Finance Bank, LLC
  • Future Micro Finance Bank, INC
  • Premium Micro Finance Bank, INC
  • Optimum Ventures Micro Finance Bank, LLC
  • Advance Alliance Micro Finance Bank, LLC
  • Bedrock Foundation Micro Finance Bank, INC
  • Sailing Ways Micro Finance Bank, LLC

9. Discuss with an Agent to Know the Best Insurance Policies for You

It is important to set aside some money for the various insurance policies that are required to operate a micro cash loan business in South Africa. You may need to consult an insurance broker to find out which ones are best for your business.

As one just venturing into this field for the first time, you will need to be cautious so as not to be tricked into policies that are not relevant for your business. Some of the basic insurance policies that you should therefore consider include;

  • General Insurance
  • Payment protection Insurance
  • Overhead expense disability Insurance
  • Credit  Insurance
  • Deposit Insurance
  • Risk insurance
  • Liability Insurance
  • Health Insurance
  • Lenders Mortgage Insurance
  • Financial Reinsurance
  • Workers Compensation
  • Business owner’s policy group insurance

10. Protect your Intellectual Property With Trademark, Copyrights, Patents

This type of business makes it possible for one to successfully run it without the need to challenge anybody in court for illegally making use of one’s company intellectual property. Except of course certain individuals of fraudulent intentions use a company’s seal or symbol to front as another company, there is no need to file for intellectual property protection/trademark in this business.

11. Get the Necessary Professional Certification

Although one can kick off a micro cash loan business without any formal certification, getting one strongly communicates the credibility of the company. Of course all businesses must acquire their business licenses, but working towards acquiring the needed certification in your area of specialization will show competency and high skill in such a competitive market.

These are some of the certifications you can work towards getting to run your own micro cash loan business.

  • Micro-Lending License
  • Certificate in Microfinance Banking Operations

12. Get the Necessary Legal Documents You Need to Operate

Some of the basic legal documents that you should have in place if you intend running your own micro cash loan business in South Africa include;

  • Certificate of Incorporation
  • Operating Agreements
  • Business License and Certification/Micro Finance Banking License
  • Business Plan
  • Insurance Policy
  • Employment Agreement
  • Operating Agreement for LLCs
  • Employer Identification Number (EIN)
  • Consulting contract documents
  • Online Terms of Use
  • Online Privacy Policy Documents
  • Company Bylaws
  • Memorandum of Understanding

13. Raise the Needed Startup Capital

Part of what will consume large amounts of money is leasing a standard office in a good business environment, equipping the office, paying the employees, and of course acquiring the funds to invest with. Apart from all these, starting a micro cash loan business is very cost effective.

Of course having a bankable business plan will help secure investments from banks and your friends. So pay attention to writing a winning business plan with all the I’s dotted and all the T’s crossed. Some of the financing options you can explore when seeking for start-up capital for your micro cash loan business include;

  • Raising money from your personal savings and sale of stock
  • Sales of personal properties
  • Sell shares to interested investors
  • Getting soft loan from your family members and friends
  • Applying for loan from the bank
  • Getting the required capital from private investors and business partners
  • Market your ideas for business grants and seed funding from angel investors and donor organizations

14. Choose a Suitable Location for your Business

In as much as a lot of the work of a micro cash loan business can be done digitally, a physical space is needed as in any other business to meet with clients. It is important to do proper feasibility study and market survey of the location before choosing to set up your office there.

See how other businesses fare in that location, also if a business similar to yours just closed shop there, you may need to find out why.

Some of the things you may want to pay attention to about your physical space is its accessibility to both people and vehicles. It would even be more advantageous to you if the area is a business district, where lots of people pass through. This alone can stand as a marketing venue to those who may just be passing by and chose to stop in for a loan.

These are some of the key factors that you should consider before choosing a location for your micro cash loan business;

  • The local laws and regulations in the community/state
  • The demography of the location
  • The number of micro cash loan businesses in the location
  • The demand for the services of micro cash loan businesses
  • The purchasing power and business activities in the location
  • Accessibility and road network of the location
  • Traffic, Parking and Security

15. Hire Employees for your Technical and Manpower Needs

You will definitely need computers, internet facility, telephone, fax machine and office furniture such as chairs, tables and shelves; and some of these items can be gotten fairly used. If you have secured enough money to run this kind of business then you can also lease a facility for your office.

There is no special technological equipment needed to run this type of business except the usual financial software, social media management applications, micro financing software customized to your business etc.

You would require at least 10-20 key staff to effectively run this medium scale enterprise. If you do not have the funding to hire trained professionals for your business due to the fact that you are just starting, you may choose to work with financial consultants and experts that will operate as freelancers.

However before making the decision to hire people, you must consider your own finances, but on average you would need to hire a Chief Executive Officer or President, you can also occupy this role if you wish, a Business Development Executive or Marketing Executive, Loan Officers, Debt Collectors, Customer Service Officer, Admin, Human Resource Manager, Head of Operations, Risk Manager, Operation Staff.

The Service Delivery Process of the Business

A Micro Cash loan Business may choose to utilize any business process and structure that guarantees them excellent return on investment, flexibility and efficiency. Some of the service processes discussed in this particular segment is not cast in stone.

One of the major differences between a micro cash loan business and other financial institutions is that while most banks have a limit to the amount they can charge as interest, the Usury Act Exempts the micro cash loan business from having a limit on its interest rates.

However, a micro cash loan business can choose to operate in the very same way other banks operate. People can invest with them and they pay them interest, while lending out the money to those who ask for loans and charge interest on the loans.

In as much as the Micro Cash Loan Business operates like a normal bank, it needs a strong business profile before it can begin to source for working capital.

16. Write a Marketing Plan Packed with ideas & Strategies

People will only invest in your business if they know they will get good returns on their investment. You would have to prove yourself again and again before pulling in the right kind of investors to give you the much needed liquid cash or working capital.

Aside from your qualifications and experience, a convincing personal and company profile will go a long way in winning investors when putting together your marketing plans and strategies for your micro cash loan business. Clearly stating what you have accomplished in the past as it relates to the financial services industry will help increase your chances in the field.

Please have it in mind that when looking for funds from banks and other financial institutions you will be called upon to defend your proposal, a good presentation skill will be most advantageous in such scenarios. Below are some platforms you can use to market your micro cash loan business.

  • Advertise your business in relevant financial magazines, radio and TV Stations
  • Introduce your business by sending introductory letters alongside your brochure to all the corporate organizations, households, startups, small and medium scale businesses etc.
  • List your business in local directories
  • List your business in yellow pages
  • Attend international micro finance and financial services expos, seminars and business fairs
  • Engage the services of marketing executives and business developers to carry out direct marketing
  • Utilize the internet to promote your business
  • Create different packages for different categories of clients in order to be more specific in meeting their needs

17. Develop Strategies to Boost Brand Awareness and Create a Corporate Identity

In promoting your brand and corporate identity you would have to leverage on the print, electronic and social media platforms.

In fact, it is more effective and wide reaching to use social media platforms to promote your business. Promoting your business should be considered paramount; hence one should be ready to invest a considerable amount of money in doing just that. Below are the platforms you can leverage on to boost your brand and advertise your business.

  • Ensure that you position your banners and billboards in strategic positions in your city
  • Brand all your official cars
  • Ensure that all your staff members and management wear your branded items at regular intervals
  • Advertise your business on your website; develop strategies that will pull traffic your way.
  • Use direct approach by calling up households, start-ups, small and medium scale businesses and the likes, and informing them of what you do.
  • Share Fliers and handbills around the target areas where you have deduced that your business will do well.
  • Encourage the use of word of mouth publicity among your loyal consumers
  • Maximize the advertising potentials of the internet.