To start a private lending company, form an entity, secure capital, set underwriting, meet licensing and disclosure rules, and build servicing.
Why This Model Works For Small Lenders
Private lending lets you deploy capital into short or medium term loans with clear security, processes, and measurable risk. You control the niche, the rate, the term, and the collateral. Returns depend on discipline.
The flipside is real exposure. You carry credit risk, regulatory risk, and reputation risk. You also face state caps on charges and limits on who you can lend to without extra rules. The plan below keeps the setup tight and compliant while you grow. If you came to learn how to start a private lending company, the steps below give you a clear route.
How to Start a Private Lending Company: Step-By-Step Plan
This outline hits the full build, from entity to servicing. Pick a lane first: consumer loans, business loans, or real estate loans. Consumer loans trigger heavier rules. Business and investor loans are lighter, but not free of oversight.
Step 1: Pick Your Legal Structure
Choose a structure that fits liability, taxes, and investor needs. Many lenders start with an LLC for flexibility, then add a manager entity and, if outside investors join, a fund vehicle. Grab an EIN and open banking once the entity exists.
Step 2: Define Your Lending Box
Write a one page credit box. Nail down borrower type, geography, loan size, LTV or advance rate, term, rate band, fees, and covenants. State the few fast deal killers. This box guides marketing, underwriting, and investor reporting.
Step 3: Map Licensing And Triggers
Licensing depends on the product and the borrower. Residential mortgage and most consumer credit need licenses and specific disclosures. Commercial loans to entities are usually lighter, but some states regulate them. If you market a credit card, wage advance, or auto title loan, expect tighter rules and active oversight.
Step 4: Choose Your Capital Stack
Start with founder equity. Add a credit line secured by receivables, a whole loan buyer, or a pooled fund when deal flow is steady. If you raise from outside investors, use private offering exemptions and clear investor screening. Pick one structure and keep records from day one.
Step 5: Draft Plain, Durable Documents
Build a core set: application, promissory note, security agreement or deed of trust, personal guarantee when needed, fee schedule, and required disclosures. Keep template names short and versioned. Track state addenda when terms or notices differ.
Step 6: Stand Up Underwriting
Turn your credit box into a checklist. Pull credit files where allowed, verify income or revenue, validate assets and liens, and inspect collateral. Price to risk. For real estate, confirm title, liens, insurance, and exit plan. For small business, read bank statements, merchant data, and tax filings. Always record the basis for the credit decision.
Step 7: Build Servicing From Day One
Good servicing protects cash flow. Set up auto pay and a daily ledger. Send clear notices and payoff quotes fast. If you escrow taxes or insurance, reconcile monthly. If you sell or participate loans, feed investor reporting with the same system.
Step 8: Create A Clean Tech Stack
Keep it lean. Use e-signature, locked cloud storage, a loan origination tool, and a servicing ledger. Restrict access by role and log changes. Test backups.
Step 9: Set Pricing, Fees, And Disclosures
Post a simple rate card by product. Spell out origination fees, late fees, and any prepayment charge. Use clear plain language. If you lend to consumers, follow standard disclosure rules on rate, APR, and timing. Keep a calendar of notice deadlines so no file slips.
Step 10: Launch, Track, And Tune
Start with a pilot pool of loans and tight limits. Track approval rate, average coupon, net yield, days delinquent, charge-off rate, and recovery. Hold a monthly credit meeting and document changes to the box. Never chase volume at the expense of documents or collateral quality.
Setup Checklist With Steps, Cost, And Time
The table below gives a high-level plan you can run in order.
| Step | What You Do | Typical Cost/Time |
|---|---|---|
| Entity & EIN | Form LLC or corp; get tax ID | $100–$800; 1–7 days |
| Banking | Open operating & trust accounts | $0; 1–3 days |
| Licensing Scan | Check state and product rules | $0–$2,000; 3–30 days |
| Capital Plan | Seed equity; draft investor docs or credit line plan | $0–$10k; 2–6 weeks |
| Policies | Write credit box, pricing, collections, KYC/AML | $0–$5k; 1–2 weeks |
| Templates | Note, security, guarantee, disclosures | $1k–$15k; 1–4 weeks |
| Systems | LOS, servicing ledger, e-sign, storage | $200–$1k/mo; 1–2 weeks |
| Launch Pilot | Fund first 5–20 loans under tight caps | Varies; 30–90 days |
Regulatory Map You Can’t Ignore
Rules depend on who you lend to and what backs the loan. Consumer credit brings federal disclosure and advertising rules along with state rate and fee limits. Mortgage lending adds more layers like appraisal and servicing conduct. Business credit is lighter, yet some states add rate caps or notice rules, and unfair acts law still applies. If you raise money from investors, securities rules apply to that capital raise too.
Two anchors to read early are the SBA business structure guide and the CFPB Regulation Z (Truth in Lending) page. The first helps you pick a structure and plan taxes; the second shows disclosure rules for consumer credit and mortgage items.
Entity, Tax, And IDs
Form the entity in a state you know. Keep ownership clear. Get your EIN from the tax agency, not a third-party site. Add a separate manager entity if you plan to run a fund or SPV. Keep resolutions on file to approve lending, bank accounts, and signing authority.
Licensing Triggers By Product
Here’s a quick view of where licenses often apply. Always check your state before you market, collect applications, or quote rates.
| Activity | Common Trigger | Notes |
|---|---|---|
| Residential Mortgage | State mortgage lender/broker license | Use NMLS; heavy disclosures |
| Consumer Installment | Consumer lender license | Rate caps and fee limits |
| Small Business Loans | Varies by state | Some states require registration |
| Merchant Cash Advance | Varies | Disclosure laws in some states |
| Auto Title/Pawn | Specialty licenses | Strict limits and audits |
| Real Estate Investor Loans | Often lighter | Still need clear disclosures |
| Raising From Investors | Securities exemptions | Rule 506(b)/(c) paths |
Underwriting That Protects Your Capital
Stick to the box. Use a two-person review for exceptions. Confirm lien position before funding. On unsecured loans, set tight limits and price to loss risk. Stress test cash flow and plan for a weaker case.
Collateral And Valuation
For real estate, use a broker price opinion or an appraisal based on risk and state rules. Require hazard insurance. For equipment, record serials and run lien searches. For inventory and receivables, sample and match cash receipts.
Pricing And Profit Math
Revenue comes from interest, origination, and sometimes servicing or exit fees. Costs include capital, servicing, losses, and overhead. Net yield after losses drives the business. Track it monthly. If losses creep up, fix the box first, not the marketing spend.
Compliance You Build Into Daily Work
Put rules into checklists and systems. Use model notices and audit trails. Lock files once funded. Train staff on advertising claims, privacy, and records. Keep a log of complaints and how you resolved them. Small steps like this limit fines and protect the brand.
Advertising And Fair Claims
Market only what you can deliver. Quote ranges you can honor. Keep example offers real. If you speak to consumers, follow standard disclosure timing and content. Keep a dated copy of each ad.
Data, Privacy, And Security
Collect only what you need. Store files in a locked system with role-based access. Use MFA and encryption at rest. Expire access for ex-staff the same day they leave. Shred what you print. Test backups and restore steps quarterly.
Money In, Money Out: Capital And Liquidity
Liquidity keeps you alive. Match loan terms to your capital terms. If your capital can be pulled fast, hold more cash and keep short loans. If you raise a closed-end fund, align the fund life to loan maturities plus a runway to collect and liquidate.
Servicing, Collections, And Recoveries
Call past-due accounts on day one, then send notices by your plan. Offer workouts that protect principal when the borrower is cooperative. If default hits and collateral is at risk, move quickly and document every touch. Use counsel for foreclosures or replevin and keep investors informed when a file turns.
Start A Private Lending Company Legally: State Rules
States write many of the rate caps, fee limits, and license triggers. Read the statutes and the regulator’s site before you open intake. Some states carve out investor-purpose real estate loans; others treat them like business credit with fewer limits. Do not run ads or take applications in a state until you know the line.
Playbook For Your First 90 Days
Week 1–2: Form the entity, get the EIN, and open banking. Week 3–4: Write the credit box, pricing, and policies. Week 5–6: Pick systems and load templates. Week 7–8: Test workflows with dummy files. Week 9–12: Fund a small batch and hold weekly reviews. If someone asks how to start a private lending company in one quarter, this plan delivers.
Common Mistakes That Sink New Lenders
Chasing rate over collateral. Funding before title or lien checks clear. Pricing low without loss data. Marketing in a state before reading license rules. Letting exceptions stack up. Weak records. No plan for fraud. Each one drains cash and time.
Wrap-Up: Build A Lender That Lasts
Keep the box tight, the books clean, and the rules part of daily work. Grow where you can show risk and return. With steady underwriting and clear disclosures, a lean team can run a durable lender.