Financial companies provide loans to individual and commercial customers for a variety of reasons. Commercial customers include retail stores, small businesses, or large corporations. Commercial loans can help an established company build a new office or retail space, or they can help a new business get up and running. Personal loans for individual customers include home equity loans, student loans, and car purchase loans. Setting up a finance company requires not only a thorough understanding of the needs of your target customers and a comprehensive product line, but also a solid business plan outlining the steps you will take to lead the company to success. In addition, every new financial company must comply with strict government regulations and meet initial funding requirements.
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Part 1 of 5: Recognizing the Business Model of Financial Companies
Step 1. Choose a specialization financial company
Financial companies tend to specialize in the types of loans provided and the customers served. Financial, marketing, and operational requirements vary from one specialization to another. Focusing on one business model is critical to the successful establishment and operation of a new company. Private finance companies range from local mortgage brokers specializing in refinancing or providing new loans to homeowners to accounts receivable cashing companies that acquire or finance accounts receivable for small businesses. The decision to pursue a particular finance company specialization should be based on your interests, experience and chances of success.
- Many financial companies are founded by former employees of existing companies. For example, former credit officers, insurance underwriters, and brokerage partners create new mortgage brokerage firms that specialize in certain types of loans (commercial or residential) or work with single lenders.
- Consider the business specialization that attracted you in the first place. Why are you interested in this business? Does this business require large start-up and operating capital?
- Is there an opportunity to create the same business in a new area? Are you going to compete with existing similar businesses?
Step 2. Confirm the existing business opportunity
The new financial company must be able to attract clients and make a profit. Consequently, researching the expected market share in which the business will compete is important. How big is the market? Who is currently serving potential clients? Is the price stable? Is the market confined to a specific geographic area? How do existing companies attract and serve their customers? How do competitors take different approaches to marketing and services?
- Identify your target market, or the specific customers you want to serve. Explain their needs and how you can meet them. This step will require you to identify key demographics that are currently underserved and how you plan to attract these customers from your competitors. You should list who these customers are and how your financial product will attract their attention. Include all the advantages you have over competitors.
- Describe your area of specialization. For example, if your market research shows that more and more small start-ups are in need of loans, explain how the financial products and services you offer are strong enough to gain significant market share.
- Consider a company that is already in a competitive market share. Are they the same size or are they dominated by one company? A similar market share can indicate a slow-growing market or a company's inability to differentiate itself from their competitors.
Step 3. Identify business requirements
What are the operating costs of the business-office space, equipment, utilities, salaries, and wages? What business processes are needed for day-to-day operations-marketing, credit officers, underwriters, clerks, and accountants? Will the prospective client visit the physical office, communicate online, or both? Will you need a financial partner such as a mortgage lender or bank?
Mortgage brokers act as intermediaries between borrowers and lenders, sometimes with discretion to determine loan sizes. Business agents usually leverage their own capital by borrowing from larger financial institutions
Step 4. Work the numbers
How much capital is needed to open this business? What is the expected revenue per client or transaction? What is the break-even sales volume? Before risking your own capital and that of others, you need to make sure that profitability is very feasible and reasonable, even if the odds are not always great.
Develop financial projections (pro forma) for the first three years of operation to understand how this business might operate in the real world. The projections must include the first year's monthly Income Statement, and subsequent quarterly reports, as well as a projected Balance Sheet and Cash Flow Statement
Part 2 of 5: Doing a Self-Assessment
Step 1. Get to know your skills
Before setting up a new company and, perhaps, embarking on a new career, it is important that you evaluate your skills and personality objectively to determine what steps need to be taken to successfully set up and manage a financial company. Have you had any special training in finance? Do you understand finance and accounting? Do you find it easy to work well with other people? Are you a leader, who inspires others to follow him, or a manager, who can assess a problem, see the cause, direct resources to implement a solution? Are you a good salesperson? Do you have a special ability that fits perfectly in the financial industry?
Step 2. Assess your emotional strengths and interests
Do you work very well alone or with other people? Are you easy to compromise? Are you patient or demanding with others? Do you easily make quick and intuitive decisions or do you prefer detailed information and careful analysis before acting? How comfortable are you with risk? Are you an optimist or a pessimist? When you make a mistake, do you blame yourself or take it as an opportunity to learn and progress?
Step 3. Consider your experience
Have you worked in the financial industry before? Are you financially and professionally successful in your current position? Do you understand marketing, accounting, legal matters or banking? Have you ever been in charge of creating new markets or leading a sales team?
Step 4. Determine your financial capacity
Do you have enough capital to set up the financial company you envision? Do you have assets that can cover living expenses during the startup stage? Will your family or friends contribute to your business finances? Do you have access to other sources of finance-personal loans, venture capital, investment funds, or financial sponsors?
Part 3 of 5: Creating a Business Plan
Step 1. Prepare your business plan
Business plans are useful in a number of functions. It is a blueprint for building your company for the future, a guide to ensuring you stay focused in your efforts, and a detailed description of your company for potential lenders and investors. Start writing your business plan by including all the required sections and leaving space to fill them in. The steps in this section should be your responsibility, starting with an overview of the business.
Step 2. Write a business description
Your business plan will outline the blueprint for your company. The first part of your business, the overview, is a summary of your organization and business objectives. Start by justifying the need for a new financial firm in the target industry or location. You should briefly identify your target market, how you plan to reach them, an overview of your products and services, and how your company will be managed.
You should also briefly describe what the opportunities in the current market are for your company (how your company will compete with competitors). You should already have this information from your initial market research
Step 3. Describe the organization and management of your company
Clarify who owns the company. Determine the qualifications of your management team. Make an organization chart. A comprehensive and well-developed organizational structure can help financial institutions become more successful.
- The Chief Executive Officer leads the "executive ranks" of the company's employees.
- The Highest Operational Officer manages the activities of the company's lending, service, insurance, and investment units.
- The Supreme Administrative Officer is responsible for marketing, human resources, employee training, facilities, technology and legal matters.
- The Supreme Finance Officer ensures that the company operates within regulatory parameters. This person also monitors the company's financial performance.
- In smaller companies, executives may hold more than one of these roles at the same time.
Step 4. Describe your product line
Describe the types of financial products and loans you provide. Emphasize the benefits of your product to your target customers. Determine the needs of your product in the market.
For example, if your target customers are small business owners, explain how the financial and investment products you offer will help them run their business
Step 5. Explain how to finance your business
Determine how much money you need to set up a finance company. Determine how much equity you have. State what percentage other investors have in the company. Indicate how you plan to finance your company with leverage (loans), where these loans will come from, and how these loans will be used in business.
- In many cases, equity in the company is used primarily for company operations, rather than a source of loans to customers. Secondary lenders provide funds to financial companies which are then loaned to customers; customer loan guarantees the lender's loan to a financial company. This is because profit is determined in the difference, or the difference between your cost of obtaining capital and the profit by lending it.
- Each funding request should indicate how much you need, how you will use the money, and the terms of the loan or investment.
Step 6. Document your marketing and sales management strategy
Your marketing strategy should explain how you plan to attract and communicate with customers and lenders/creditors. This strategy should also show how you plan to grow the company. The sales strategy determines how you will sell the product.
- The promotional strategies used include advertising, public relations, and printed materials.
- Business growth opportunities include not only staffing, but also acquiring new business or starting to offer a variety of products.
- The sales strategy should include information on sales force size, procedures for sales calls, and sales goals.
Step 7. Include financial statements in your business plan
Review the pro forma financial statements you created during business planning, making sure that your projections are reasonable and conservative. You may also want to carefully estimate performance over the next two years after that. Include ratio analysis to document your understanding of financial trends over time and predict future financial performance.
- Prospective financial data should provide monthly reports for the first year and annual reports for the following two years.
- Standard financial ratios include gross profit margin, ROE, current ratio, debt to equity ratio.
- Ratio and trend analysis data help you document whether you can continue to serve your customers over time, how well you are utilizing your assets and managing your liabilities, and whether you have sufficient cash available to meet your obligations.
- Add charts to your analysis to illustrate positive trends.
Part 4 of 5: Determining the Business Structure
Step 1. Consider forming a Limited Liability Company
A Limited Liability Company (PT) is similar to a large corporation in that it protects its owners from personal liability for debts or actions taken by the business. However, they do have the tax advantages of a sole proprietorship or partnership. A large corporation usually records taxes separately from its shareholders.
- Note that large corporations pay double income tax. That is, taxes are levied when profits are earned, and then when they are distributed to shareholders.
- You should seek legal considerations to determine the best structure for your business.
Step 2. Decide on a name and register your business
Choose a name that represents your brand and is unique enough to get a website address or URL. When choosing a name, check with the Directorate General of Intellectual Property to make sure you are not infringing on any trademarks. Check if the name is already in use by another company.
- You must register a company name. The complete registration process varies according to the type of company you are starting.
- Your business name is one of the most important assets. Therefore, protect it by applying for trademark protection at the Directorate General of Intellectual Property.
Step 3. Obtain the necessary operating licenses and permits
The license to establish a financial institution is obtained from the Financial Services Authority (OJK). Determine exactly what type of financial institution you are establishing, such as an investment company or licensed lender. Then complete the required documents and pay the specified establishment fee.
- The nature of the financial services industry is complex and constantly changing. Therefore, financial companies are advised to hire and employ expert legal advisors to guide them in carrying out these regulations.
- You must also comply with all licensing requirements regarding office space, such as public and workplace safety regulations and operating permits.
Step 4. Learn the rules
The applicable financial regulations are related to security and compliance aspects. Security regulations protect creditors from losses arising from the bankruptcy of financial institutions. Compliance regulations aim to protect individuals from unfair transactions or crimes committed by financial institutions. Financial regulations must be implemented by all financial institutions.
- Financial regulatory institutions in Indonesia include Bank Indonesia (BI), the Deposit Insurance Corporation (LPS), the Financial Services Authority (OJK), the Commodity Futures Contract Trading Regulatory Agency (BAPPEPTI), and the Indonesia Stock Exchange (IDX).
- Local regulatory agencies may require additional requirements that are even more stringent than those set by the central agency.
- With the help of your legal advisor, find out the reserve and start-up funding requirements for your company. This step will determine how much startup funding you need.
Step 5. Protect yourself from risks and liabilities with indemnity insurance
Indemnity insurance will protect you and your employees if someone sues you. Financial institutions must purchase a special indemnity insurance called Error and Default (E&O) insurance. This insurance protects financial companies from claims made by clients due to inadequate work or negligence. This is often required by government regulatory agencies. However, remember that compliance with all regulations is your responsibility.
Part 5 of 5: Preparing the Office Space
Step 1. Get funding
You need to finance your company according to a business plan, using a combination of equity and debt finance. The startup costs will be used to meet the reserve requirements and the construction or leasing of office space. From there, most of the company's operating capital will be loaned to customers.
- Investors may wish to provide funding in exchange for equity in the company. This is referred to as equity finance and makes investors a shareholder in the company. You don't have to pay these investors, but you have to share the profits with them.
- Pay attention to state laws governing private investor requests. Compliance with securities laws regarding information provided to potential investors and investor requirements will apply in most circumstances.
- Sources of debt financing include loans from governments and commercial lending institutions. Money borrowed with debt financing must be repaid over a certain period of time, usually with interest.
- The Small Business Administration (SBA) partners with banks to offer government loans to business owners. However, this loan can only be used for the purchase of equipment, not loaned to others. The SBA helps lending institutions make long-term loans by guaranteeing a portion of the loan in case the business goes bankrupt.
- Financial companies face the problem of having to raise large initial funds to be successful. They also often have to face many other challenges before making a profit. Without taking into account issues such as fraud, financial companies are easy to fail.
Step 2. Choose your location
Financial companies must create a positive impression for customers. Customers seeking loans want to do business in a place that gives the impression of being trusted and pleasant. Take into account the environmental reputation of a particular building and how it will impress customers. Also consider how customers will reach you and proximity to competitors. If your target customer is a small local business, for example, they may not want to travel to remote locations or deal with heavy city traffic to meet you.
- If you're not sure, contact your local city planning agency to find out if your desired location is classified as a commercial area, especially if you plan to operate from your own home.
- Renting commercial office space is expensive. Consider your financial situation, not just what you can afford, but also other costs such as renovations and property taxes.
- In today's connected world, running a financial company online, without a location for physical interaction with customers is possible. While you may still need an office for your employees, not having a sales location can save you some money.
Step 3. Hire and hire employees
Write effective job descriptions so employees and applicants understand their role in the company and what your expectations are of them. Develop a compensation package, including mandatory and optional benefits. Write an employee handbook that communicates company policies, compensation, schedules, and standards of behavior.
Do a pre-employment background check to make an informed decision about who you hire. Financial planners and advisors require a certain educational background and are subject to strict certification requirements. Consider requesting a credit report to show how much financial responsibility a candidate has
Step 4. Pay your taxes
Register the Taxpayer Identification Number (NPWP) from the Tax Office. Know your tax obligations. State tax obligations include income tax and labor tax. Governments also sometimes require payments for workers' compensation insurance and unemployment insurance taxes, as well as payments for disability insurance.
Step 5. Create loan packages for your clients
Decide whether you will offer a revolving or fixed type of credit. Think about your target customers and what type of loan they will need. Homeowners and individuals may be looking for a mortgage, car purchase loan, student loan, or personal loan. Entrepreneurs may be looking for a small business loan. Consolidated loans can help customers who are struggling to manage their finances.
Be aware that your loan offers, interest rates, and terms must constantly be rearranged according to changes in the loan market. Some of these elements are also subject to various regulations. So, consult your legal advisor before finalizing an offer
Step 6. Market your new financial company
Direct your marketing efforts at your chosen client niche. Marketing includes networking and advertising, but there are other ways to let potential customers know that you've set up a business. Become a familiar face in your local business community by attending and speaking at events sponsored by your local chamber of commerce. Publish communication media such as newsletters or e-magazines. Participate in social networks like Facebook, LinkedIn, and Twitter.
