Consumer credit is not only important to making big-ticket purchases such as buying a home with a mortgage, but also necessary to covering small-item expenses like paying monthly bills using a payday loan. The time lag between ongoing spending needs and receiving income later demands some form of credit to fill the gap. Payday lending does not check customers' credit situations and can conveniently meet such a need, especially when other means such as credit card uses may be limited as card issuers have imposed tighter application standards. Payday lenders that follow the law and treat customers fairly can take advantage of this market condition to safely advance quick cash to customers ahead of their pay checks.
Apply for a state license. Individual states are the primary regulators of payday lending. Laws vary among states in terms of maximum loan amount and finance charges among other things, according to the National Conference of State Legislatures, and some states do not have payday-lending practice by law. When choosing to have an Internet presence, be aware of regulations in other states where an Internet payday lender is effectively operating if lending offers are made to customers in those states.
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Open a transaction account with your bank. The most efficient way in payday lending is crediting and debiting a customer's checking account when releasing and collecting funds. This is done through electronic funds transfer and an appropriate transaction account with the payday lender's bank allows the lender to give instructions to its bank, which then initiates fund transfers through the automatic clearinghouse on behalf of the account holder.
Develop a business plan. Internal operation and external marketing are the two basic elements in any business pursuit. For a payday lender, a business plan addresses the issues of funding, fee structures, collection practice, marketing efforts, etc. For example, on the funding issue, since the maximum amount of a payday loan is around $500 by law, depending on the intended scale of the business, the payday lender can fund its starting capital accordingly.
While lending to certain customers may still involve cash transactions, payday lenders require that customers have a checking account and present a postdated check when applying for a payday loan.
Some lenders may also need to register as a money service business at the federal level. Payday lending is also referred to as check cashing, which falls under one of the several categories that form the basis of the regulatory definition of money service business based on the Bank Secrecy Act. Lenders that process loan amounts in excess of $1,000 per person per day are required to register with the Financial Crimes Enforcement Network, the Administrator of the Bank Secrecy Act, at the Treasury Department.
- National Conference of State Legislatures: Payday Lending
- Financial Crimes Enforcement Network: Am I an MSB (Money Services Business)
- Financial Crimes Enforcement Network: Definition of Check Casher (Payday Lenders)
- Community Financial Services Association of America: Leading the Payday Advance Industry