How to start a money lending business
By Equipo Prestafolio
The complete guide to starting a lending business: capital, rate, who to lend to, how to formalise each loan, and the mistakes that sink a new lender.
Lending money as a business is not "having savings and handing them to whoever asks": it is a business with working capital, credit risk and cash flow, just like a shop or a workshop. The difference between the lender who grows and the one who goes under in the first year is almost never luck: one treats it as a business from the very first loan, and the other improvises as they go.
Is this business for you?
Before you lend the first peso, be honest about three things:
Question | Why it matters |
|---|---|
Can you live without that capital for 3-6 months if something goes wrong? | Lent capital stops being available for the life of the loan, and part of it does not come back |
Do you have the stomach to collect, including the uncomfortable conversations? | Lending is easy. Collecting is the real job (see How to collect from a client who is not paying you) |
Do you have time to keep records for every loan, every instalment, every payment? | A lender with no records has no business, just a list of favours they hope get paid back |
If you answered yes to all three, keep reading. If not, this is not yet your moment, and it is better to recognise that before the money hits the street.
Step 1: set your capital and how much you lend per client
Working capital is split across active loans, not lent out all at once. A reasonable starting reference:
Available capital | Suggested average loan | Approximate simultaneous clients |
|---|---|---|
Low (personal savings) | 5-10% of total capital | 10-15 |
Medium | 3-5% of total capital | 20-30 |
High | 1-3% of total capital | 30+ |
The logic behind "no more than 5-10% in a single client": if one does not pay, your business loses a manageable slice, not an entire season's capital. Concentrating capital in a few large loans is the fastest way to go under from a single default.
Step 2: decide your rate before you decide who to lend to
The rate is not copied from another lender, it is calculated: cost of money, expected loss, operating cost and margin. If you do not have this clear before lending, you do not know whether you are earning or giving away your time for free. We walk through the full formula and worked examples in How much interest to charge for lending money.
And before you set any number: check what your country's law says about interest caps. We cover it by jurisdiction in Is it legal to lend money with interest?.
Step 3: evaluate who you lend to, not just how much
The interest you charge compensates for the risk you take on, but no interest rate compensates for lending to someone who was never going to pay. Before handing over the money, check: do they have verifiable or at least regular income?, do they have references that confirm their payment behaviour?, do they already owe another lender? We cover the concrete signals in How to tell if a client pays well.
Step 4: formalise every loan, no exceptions
"He's my cousin, we don't need a promissory note" is the sentence that has cost informal lenders in the region the most money. A promissory note is not distrust, it is the difference between being able to claim through the legal route if something goes wrong and being left with a verbal agreement nobody can prove. How it is done, what it must contain, and when to have it notarised: Promissory notes and loan contracts.
Step 5: decide your collection frequency
Daily, weekly, biweekly or monthly is not just about the client's preference: it changes your risk, your operating cost and, as a result, your rate.
Frequency | Who it suits | What it demands of you |
|---|---|---|
Daily | Traders with daily income (stalls, sales) | Physical presence every day, or digital collection |
Weekly | Employees paid weekly | Constant follow-up, less than daily |
Biweekly/monthly | Formal employees, stable businesses | Less management, but you find out about problems late |
Promising daily collection without showing up daily is the most common complaint clients have about informal lenders: if you promise presence, keep it.
Step 6: keep records from the first loan, not the fifth
The most common mistake a new lender makes is keeping everything "in their head" for the first few months, because there are few clients and it seems unnecessary. The problem shows up in month 4 or 5, when you no longer remember whether so-and-so paid last week's instalment or the one from two weeks ago. Start with a template from loan number one: Excel template for lenders.
Step 7: keep the loan business's cash separate from your personal pocket
If the money you collect mixes with your daily spending, you will not know whether the business is really performing or whether you are quietly eating into your capital. Even if it stays informal, treat the loan cash as a separate account: what comes in from instalments, what goes out to new loans, and what you withdraw as profit are three different things.
How much you need to get started
There is no legal minimum, but there is a practical one: below a certain amount of capital, the business does not diversify enough to absorb a default without disappearing. As a reference (not a rule): with fewer than 10-15 simultaneous active loans, a single non-paying client represents more than 7-10% of your portfolio, a hard hit to absorb in the first few months.
Mistakes that sink a new lender
Mistake | Consequence |
|---|---|
Lending all the capital to 2-3 clients | One default wipes out the business |
Not charging arrears, "to not be harsh" | You teach everyone that being late costs nothing |
Setting the rate by copying another lender | You undercharge if your risk is higher, and you will not know until it is too late |
No promissory note "because I trust them" | No legal backing for a real default |
Reinvesting 100% of what you collect without setting profit aside | You do not know if the business is leaving you anything or just cycling capital |
Frequently asked questions
How much money do I need to start? There is no fixed floor, but the less capital you have, the more diversified you need to keep it. It is better to start with several small, well-evaluated loans than with two or three large ones.
Can I only lend to people I know at the start? That is the most common and reasonable way to begin: it reduces evaluation risk because you already know the person's behaviour. The risk runs the other way: closeness makes it harder to collect firmly when the time comes. Apply the same collection ladder as you would to any client.
Do I need a storefront or a registered company? It depends on your country and the volume you handle. In most jurisdictions, lending occasionally between individuals does not require registration, but doing it habitually and as a main activity may. Check Is it legal to lend money with interest?.
Summary
- Treat it as a business from loan number one: working capital, risk, cash flow.
- Do not concentrate capital: 5-10% per client as an initial reference.
- Set the rate by calculating it, not copying it, and check your country's law first.
- Evaluate who you lend to, formalise with a promissory note, and keep records from day one.
- Keep the business cash separate from your pocket to know whether you are actually earning.
Prestafolio is with you from the first loan: register clients, simulate the instalment before handing over the money, and keep the business cash separate from your pocket, all from your phone. See What is Prestafolio and First steps.