Starting a finance company

[Muzzy001]

Hi All,

I'm in the throws of forming a business plan for a new lending company for a very particular industry.

It is, as far as my research has shown, totally untapped with no finance being offered for this particular product. My experience and those that I have spoken to is that there is a very definite market. Regardless of this, research shall prevail and nothing will happen until proven.

However, before spending the next few weeks writing the plan I'm looking for some pointers around the lending market to enable a cash flow forecast to be as accurate as possible.

I will offer 2 packages.

1) The intermediary (shop) will offer 0% finance on their product aka DFS etc.
2) The end consumer will pay the loan plus APR rate as set by myself but the intermediary will promote the facility in-store to borrow.

A couple of questions arise.

Option 1 - with whom does the loan ultimately sit, the shop or the consumer?
I would imagine, and please correct me if I'm way off, the loan for the capital is with the consumer and any default is my liability, and the APR amount is paid in one lump sum by the shop? e.g. I buy a sofa for £1200 from DFS over 12 months at 0%. DFS would pay the loan company the APR in one hit, say £66 if the APR was at 10% and I, the consumer, would pay £100 a month.
I default and the loan company comes after me?
Any ideas what the APR rates are like for companies like DFS? I'd be looking at similar amounts over similar time scales. I'm guessing my forecast may well dictate.

How would one account for defaulters in the forecast? I'm envisaging about 8% default. It's not as simple as just taking the capital + principal for a month and multiplying by 8% as I'm guessing a percentage do end up paying, some debt may be sold on etc. Anyone ever done this before or have any pointers? I've hit a bit of a mental block to be honest and I'm tempted to go with the "we will lose 8% and anything else is a bonus", not ideal but not a bad place to start I'm guessing.

One more thing, loan software. I'd like something web based so that loans can be done on-line by the sales assistant with the customer, automatic credit checking with a "Yes/No" result in real time. A little like wonga I guess. I've looked at a few solutions but wouldn't know where to start with costs? Any general idea of what a solution/license like this may cost? It would have to incorporate debtor chasing capabilites, with automatic letters and flags? I.m guessing it will also receive the monies somehow to update customer records?

I have many more queries but will leave it that before I make myself look clueless.

Rest assured research is ongoing!

Thanks in advance.

James

 

[businessfunding]

the answer to most of your questions will be 'it depends'

The contract is between the lender and the borrower, but it is entirely possible that DFS (or the introducer) will have negotiated some form of guarantor or loss-pool with the lender to sweeten the underwriting process

DFS are probably the biggest retail consumer seller in the UK, so obviously have a lot of buying power and will have put together a good structure with their provider (HSBC, I believe)

Yes, the finance company will pay DFS with interest deducted - - if you are looking at 8% bad debt provision you can assume the interest charge will be at least 18%

Obviously the rate of default will be defined by your underwriting process and your collection procedures - both of which are critical to success

Finally, how will you be funding this? Unless you have significant capital you will struggle to get backing for a retail finance venture

 

[Muzzy001]

Yes, the finance company will pay DFS with interest deducted - - if you are looking at 8% bad debt provision you can assume the interest charge will be at least 18%

Having played with the initial numbers I'd be looking closer to 22%.

Obviously the rate of default will be defined by your underwriting process and your collection procedures - both of which are critical to success

The underwriting process is fairly set although I would obviously like as much of it automated as possible. Credit checks will be carried out by the 'introducer'. Anyone have experience of software houses offering such a solution and their potential costs?

Collections are not something I have any experience with. Software I presume would automatically send out increasingly severe letters and ultimately the debt be sold on if the letters fail?

What I am struggling with are debt recovery figures. If 8% default what is a reasonable % that eventually pay? It has a fairly large impact on any forecast but I'd be guessing if I said 50%. I'd obviously rather be pessimistic.

Finally, how will you be funding this? Unless you have significant capital you will struggle to get backing for a retail finance venture

Ah, the kicker. To be honest I don't know. I really am simply in the process of putting together some figures to see if it's viable. I'm fairly certain the market is there and I'm hoping if the figures stack up someone may be able to underwrite for me? Or am I living in a dream world??

Many thanks for your reply.

 

[tony84]

I would be surprised if there isnt finance in place for what you are offering, even if its not specifically for that purpose. I can get loans for ANY legal purpose.

Putting that to one side:
The loan will ultimately sit with you, otherwise the shop would have to get a consumer credit license which is between £600-1200.

Im struggling to get my head around how the shop can offer 0% finance, yet your going to charge interest - at best that seems like miss selling at worst it sounds like a con... im not judging, im either not getting it or you need to sit and think about which you want to do.

As for the credit checks, we have software we can do this. There are 3 main credit reference agencies - experien, equifax and call credit - the first 2 generally have the most info on so from your perspective would probably be the better ones to have. Call them up and ask what options they have available - off memory i think they start at about £100 for something like 50 searches.

You would need a specialised system here.
Part of which would allow your users (the shop) to log in and submit an application.
You would then need an admin side to firstly set up these users and to also do the printing and monitoring of the payments... this wont be cheap. You might be best trying to find a company who can offer some sort of off the shelf system and pay for changes you need.

 

[Muzzy001]

I would be surprised if there isnt finance in place for what you are offering, even if its not specifically for that purpose. I can get loans for ANY legal purpose.

Research thus far hasn't thrown anything up in the market. It is a very niche market but it did have 1.2 million customers last year (I'd be looking at targeting between 0.5% and 2%). I believe this to be achievable.

The loan would be offered by the shop and, aside from commission, would enable customers to purchase. It would certainly add value to the offering.

Putting that to one side:
The loan will ultimately sit with you, otherwise the shop would have to get a consumer credit license which is between £600-1200.

As I thought. Thanks.

Im struggling to get my head around how the shop can offer 0% finance, yet your going to charge interest - at best that seems like miss selling at worst it sounds like a con... im not judging, im either not getting it or you need to sit and think about which you want to do.

The customer pays 0% e.g. £1,200 over a year at £100 pm, and the 'shop' pays the interest to me in one lump sum (£1). 0% available to the customer. Other packages would be available, this was just one option.

As for the credit checks, we have software we can do this. There are 3 main credit reference agencies - experien, equifax and call credit - the first 2 generally have the most info on so from your perspective would probably be the better ones to have. Call them up and ask what options they have available - off memory i think they start at about £100 for something like 50 searches.

Thanks, I believe I have this side of the business tied up but it's good to know.

You would need a specialised system here.
Part of which would allow your users (the shop) to log in and submit an application.

You would then need an admin side to firstly set up these users and to also do the printing and monitoring of the payments... this wont be cheap.

You might be best trying to find a company who can offer some sort of off the shelf system and pay for changes you need.

Thanks, this is where I am struggling. Setting up users etc is understandable and a certain level of staffing has been factored in to the forecast.

Ideally, I'd be looking at something similar to the Wonga model with instant decision making and automated payment (to the shop, the customer never sees the money).

The costs of such a solution are not obvious but I'm guessing (perhaps incorrectly) that there are companies out there already offering such packages.

 

[tony84]

I used to work for RBS credit cards... many moons ago. We used to have a back office system which was provided by experian. I think you will need to speak to one of the credit agencies to see what solutions they provide.

They may have a simple web based system you put onto your website and then their system does everything behind the scenes. I have never used wonga but i assume it works in exactly the same way as the mortgage lenders websites i use in that it brings results back in a matter of seconds.

http://www.experian.co.uk/business-services/credit-risk-management.html?sc=701604

http://www.equifax.com/business/sme/en_gb

I think if you speak to someone at these places they will have a system for you.

 

[Chris Ashdown]

What is your background and financial backing , Your questions are so basic it's hard to take you serious, a couple of weeks on a plan, no basic knowledge Presumably no licence but better thoughts than the financial experts in a thousand proffessional companies in finance

 

[Muzzy001]

What is your background

COO of a small software company that is likely to be bought out within the next year, hence looking at new opportunities.

and financial backing

As stated above, nothing at the moment. I'm fairly sure any backing would be a result of any plan, non? I do have plenty of access to VCs etc. but wouldn't dream of entering them into any discussion currently.

Your questions are so basic it's hard to take you serious

I'm looking for basic information.

a couple of weeks on a plan, no basic knowledge

Is there a set time period in writing a business plan before which I must not gather knowledge from elsewhere?

Presumably no licence

Correct. Why spend the £1500+ when I'm not sure the business would be sustainable. Plan>Finance>Licenses?

but better thoughts than the financial experts in a thousand proffessional companies in finance

Better thoughts in that I believe there to be a market? My business plan will hopefully tell me if my thoughts are 'better'.

 

[Muzzy001]

At this time I am simply gathering information around potential costs, packages and options.

As you say, I'm 2 weeks in to a 6 month process. I'm just hoping people can impart some knowledge from their experience whilst I carry out my own research into the market.