While various other niches can fluctuate and be fairly unpredictable, the business of handling and organizing money is a lot more stable. The smallest pop-up shops to the largest multi-national corporations all need loans and financial aid. Aside from that, individuals need personal loans, home equity loans and so forth. The take is vast, so it’s fairly understandable that you may be setting out plans to start your own financial services firm. Like with any business niche, you need to have a solid plan in place and a clear idea of where you want to take your business in the future. Here’s a brief guide on starting your finance company.
Just like launching any kind of venture, you need to start off by setting out a business model for your finance company. This should start with you identifying a specialty you’d be happy to operate within. Almost all financial services companies specialize in the kinds of loans that they authorize as well as the type of customer they deal with. The specialty you choose will have a direct impact on the financial, operational, and marketing requirements of your firm overall. If you want your business to be successful in its creation and operation, then you need to make sure you’re focussing on a single business model. Specialties range from private mortgage brokers who keep themselves to the refinancing niche, all the way to factoring companies that acquire account receivables for various businesses. Whatever specialty you end up choosing, it needs to be based on your experience, interest, and the overall likelihood of success. Experience is one particularly important factor to consider. A lot of these firms are first set up by the former employees of other finance companies. Underwriters, loan officers, and broker associates will all have an extensive knowledge of the industry, and will be able to hit the ground running better than most. Your interest is another big factor. Consider why you were first attracted to this or that specialty, and the relative start-up capital a firm in this niche could need to secure. Is there some opportunity for starting the business in a new area, or will you have to bite the bullet and stand up to the competition?
Before you throw yourself out into the world of financial services, you need to actually confirm how viable your business opportunity is. Your firm needs to be able to bring in valuable clients and turn a healthy profit. For this reason, you need to do a lot of research into your intended market space, and figure out how easy it will be for your business to compete here. How big is the current market? Which firms are currently serving your target customers? Are the prices stable, or fluctuating wildly? These are all important questions you need to ask in validating your business idea. Your target market is obviously a very important thing to establish. Without anyone paying for your services, you’re not going to have a business! Pinpoint your target market’s needs and how you’re going to meet them better than the competition. This will mean identifying several precise demographics who you know are underserved, and then a strategy of drawing those people away from your competitors and closer to you. This will be a key factor in the specialization you’re planning to assume. For example, if you carry out some market research and find there’s a large number of fledgling start-ups looking for small business loans, you’ll need to outline how your products and services are strong enough to carve off a good share of the market. This will also have a fairly potent impact on your financial website design and other marketing materials.
Of course, starting a successful financial services company requires a lot of number crunching. The first thing on your list should be calculating how much capital it will require to open the business in the first place. What’s the expected revenue per transaction per client? What sales figures will you need to meet when you break even? Before you consider risking your own capital and that of your investors, it’s essential to figure out if your business’s profitability is going to be reasonable and feasible, not to mention likely! Work your way through all the necessary maths, and then transcribe this into pro-forma financial projections for the first three years of your operations. This will give you a greater understanding of how your business is going to perform once it actually exists and starts trading. These projections should have month-to-month income statements for the first twelve months, followed by quarterly statements for the next two years. Projected balance sheets and cash flow statements should also be part of this phase. The more you can project, the easier it will be to form airtight business strategies from there on.
While the demand for any financial services firm is pretty healthy, there are still countless obstacles and challenges that your firm is going to have to overcome if you want it to be successful. Finding out about all of these can be quite daunting for many would-be financial entrepreneurs, and make many of them think twice about even pursuing their business idea. To give you some idea of what you’re up against, we’ll go over some of the big mistakes which you need to avoid when establishing a financial services company.
One of the biggest slip-ups you can make in raising your company from the ground is ignoring the ever-changing regulatory landscape. Wherever someone’s making money, government oversight and regulation isn’t far behind. This can be strict and complex enough for small retail operations, but financial service firms often face even more complex rules. The regulatory landscape is constantly changing for financial service businesses, and if you don’t keep up with these your business can run into all kinds of costly complications. You should be aware that whenever you handle personally identifiable financial data, try to move money, or get paid, there will be some kind of regulation tied to it. A few of these are fairly easy to understand, but to make sure you don’t get stuck with any of them you need to find some expert legal advice. Obviously, these regulations are needed to protect customers from exploitation. However, you’ll find that a lot of these are outdated, or don’t support modern, more convenient technologies. For example, when transferring money, you’ll usually need to fill out some paperwork with the help of your lawyer, rather than simply clicking a few buttons on a website.
Another potentially lethal mistake is not raising the necessary capital to make your venture happen. Let’s take a look at one of the most successful financial service companies in the world: PayPal. This company is now absolutely massive, and this success wouldn’t have been possible without enough capital resources or the support of various investors. Just after the millennium, when PayPal was facing a substantial threat from online fraud, the monetary resources more or less saved the business. The need for dependable coffers ties in with all the various regulations which financial firms need to operate under. When you’re stepping over all these rules and practices, it can be very difficult to tighten belts and bootstrap your business into a healthier state. One online lender, Prosper, went through one tough period where it had to put its operations on hold because it failed to meet some SEC regulations. It’s thought that without the help of various affluent investors, this little start-up would have gone under a long time ago.
The final blunder which you need to avoid is starting your business thinking that you’ll be able to use a lot of accurate, standardized financial information. Like many others, you might think that all the tech at your disposal will make it easy to gather financial data with high accuracy. You could give people easier access to the data relevant to them, and automate various important financial decisions. Unfortunately, it’s not as simple as all that! You need to combine and process all your available data to make sure it’s as accurate as possible. In all likelihood, you’re going to be helping your clients to make various financial decisions, and will expect various kinds of accurate and current information. This means that you’ll be stuck with the difficult task of integrating several different data sources. This will include data from credit bureaus, payment information, transactional data from people’s personal bank accounts, and behavioral information. Despite all our leaps in technology in recent years, the information from various financial institutions is still not standardized or consistent. Due to this, your financial firm is going to have to take care of all kinds of background engineering work if you want to deliver real value to your customers.
While this guide isn’t exhaustive, it will certainly give you a clearer picture of the future of your financial services business. Once you know a little about the market, and the various challenges you’ll have to deal with, starting and running your business will become so much easier.