Imagine this:
You lend someone ₦100,000 out of that money sitting quietly in your account. At the end of the month, they return ₦118,000.
That is 18 percent interest in 30 days. Now imagine you did that consistently. With systems, with structure, with sense.
That, in very simple terms, is money lending business.
Every single day in Nigeria, people need money for different purposes such as rent, business, school fees, for emergencies and for ideas that can’t wait till salary day. People can delay owning real estate. They can delay buying a car but they cannot delay money they need to sort out something important. So, the loan business keeps growing.
However, there is the other side of the story nobody likes to talk about.
Bad debt, borrowers disappearing without paying their debt, cash flow drying up, businesses shutting down within 6 to 12 months etc.
In this article, you will learn how you can start a loan business in Nigeria the right way, with special attention to structure, legality, borrower vetting, and debt recovery, such that you are not just lending money, but also making sustainable profit.
What is a money lending (loan) business?
A money-lending business is simply the business of giving out money to individuals or businesses with an agreement that the money will be repaid within a specified time, with interest.
It sounds so simple but there are layers of structures to be put into consideration which include risk management, cash flow control, legal protection and human behaviour.
Money solves a huge percentage of problems; so it is always in demand. And that same demand is what attracts people who are not prepared to repay. This is why it is important to put these structures in place.
Categories of loans in a money lending business
Before you get license or capital to start, you need to understand what type of loans you want to offer.
1. Secured vs unsecured loans
Secured loans are backed by collateral. Car papers, landed property, valuable assets.
Unsecured loans have no collateral. Payday loans fall into this category.
Unsecured loans attract higher interest, but also higher risk.
2. Conventional loans
These are regular loans with fixed repayment terms and interest rates.
3. Closed-end vs open-end loans
Closed-end loans have a fixed amount and repayment period.
Open-end loans allow borrowers to draw funds up to a limit, like credit lines.
As a beginner, closed-end loans are safer and easier to manage.
Types of loan businesses you can start in Nigeria
Some common loan business niches include:
1. Personal loans
2. Payday loans
3. Auto loans
4. Student loans
5. SME or business loans
What size of loan business are you starting?
You have to know what size of loan business you want to start because it will determine the structure you put n place for it. It could be one of the following;
1. Micro lender: Small amounts, mostly personal or payday loans
2. Small lender: Structured operations, small team, growing loan book
3. Institutional lender: Large capital base, digital systems, full compliance
Capital required to start a loan business in Nigeria
These are the different capitals you will need to start a loan business.
1. Startup capital
This will cover business registration, licensing, office space and legal documentation. In Lagos, the application fee is about ₦25,000 and the money lender license fee is about ₦200,000
You get your permit from the magistrate court which you will need to get your license.
This is the actual money you will lend out. Do not make the mistake of mixing it with operational funds.
3. Running capital
This covers staff salaries, software and tools, utilities, day-to-day operations
Mixing these three is one of the fastest ways to kill a loan business.
Read: How to differentiate between good debt and bad debt
What size of loan business are you starting?
Your structure depends on your size.
Micro lender: You will give out small amounts, mostly personal or payday loans
Small lender: You will have structured operations, small team and a growing loan book
Institutional lender: You have a large capital base, digital systems with full compliance
Legal structure and licensing in Nigeria
If you want to run a serious loan business, you need a license.
For private money lenders, these are some key requirements:
1. Register your company with the Corporate Affairs Commission (CAC)
2. Minimum share capital of ₦20 million (this is valuation of the company, not cash at hand)
3. You must have at least two directors
The directors must have:
- Tax Clearance Certificates for 3 years
- Police character report
- Biometric verification
5. A lawyer: A lawyer is very important to help with legal proceedings.
Legal, ethical and practical issues to consider
As for any business endeavour, there are certain issues to consider. They include:
1. Poor borrower vetting
Giving loans without proper checks is gambling, not lending.
Borrower vetting includes identity verification, address confirmation, employment or business checks, credit history (where possible), and even social media behaviour.
2. Weak legal agreements
A loan agreement must be clear, simple, enforceable and aligned with local lending laws
Complex grammar does not mean strong protection. If the borrower does not understand it, disputes may follow.
3. Lack of follow-up systems
Some lenders assume that once money is disbursed, repayment will magically happen. It doesn’t.
Follow-up is part of debt recovery. You need to know when reminders start, when escalation begins and when it is time for external help for recovery.
Experts you need when starting a loan business
1. Loan and recovery officer
You can handle this at first, especially if you don't have enough to employ for that role yet.
2. Credit risk analyst
Do not assume you can do this alone. Do not try to take this position by yourself. You might have an idea but get one. The person will be responsible for assessing credit worthiness of your loan applicants. Also, adding some extra terms and conditions, when needed.
3. Finance expert:
There should be an accountant to organize inflow and outflow. The person can also double as a tax expert for you.
4. Customer service personnel: The job of this person is to follow up and interface the customer.
5. Business and debt recovery lawyer:
A lawyer(specifically a business and debt recovery lawyer) is needed for this venture. They will help with legal documentation and corporate expertise in debt recovery.
6. Corporate trainer:
You should conduct trainings for your team once or twice a year to stay updated and informed.
Technology and automation for loan businesses
You don't need millions to go digital.
There are entry-level tools, free or freemium softwares, and hybrid systems combining manual and digital
You can also infuse automation to help with payment tracking, follow-up reminders, record keeping and cash flow monitoring.
How to prepare for debt recovery before you lend
You must think about this and plan for it even before you give out the first loan.
1. Escalation structure
Borrowers should know what happens if they default, when internal recovery actions are taking place and when it is escalated to external recovery.
A grace period and warnings can be issued before escalating the issue.
As someone once said: There is a time to be mild and a time to be firm.
2. Evidence matters
Always attempt recovery internally first and make sure to document everything. It strengthens your legal position if escalation becomes necessary.
Setting interest rates the smart way
You don’t need to charge the highest rate in the market. You need to charge the smartest rate for your structure.
Profit matters, but sustainability matters more. Interest rates should be competitive within your market, aligned with regulatory limits, high enough to cover risk, and low enough to encourage repayment.
Common mistakes new loan business owners make
1. Lending without proper vetting
2. Operating without a license
3. No debt recovery plan
4. Mixing loan capital with expenses
5. Overexpanding too early
6. Ignoring legal advice
7. Spending profits instead of reinvesting
With the right systems, money lending can become a steady cash flow machine.
Research continues to show that fintech and lending are among the most profitable industries globally. The reason is simple. People need money every day. The opportunity is real; so is the risk.
This article was written by Damilola Abraham Olágúnjú, a personal finance enthusiast who helps individuals build healthier money mindsets and make smarter everyday financial decisions. You can read his full profile and check out his articles here.
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