Starting a loan business in the United Kingdom

In the United Kingdom, credit is the foundation of everyone’s life and how they build their dreams. Whether you’re getting your first car, a mortgage for your dream home, or a business loan to kickstart your entrepreneurial journey, you’ve got loads of options to pick from. 

When you rent a house or get a phone contract; that’s credit as well as the landlord or the telco has extended services to you with the hope you pay back by the end of the month.

Credit is the bedrock of every developed country, and the UK is no different.

While traditional banks dominate the lending scene, digital lenders also play a big part in offering credit services to small businesses and individuals.

Compared to some other countries, formal credit consumption is relatively high with about 30 billion pounds being taken as consumer loans as at July 2023, and 39% of businesses seeking business loans.

So if you’re considering starting a lending business in the UK, you’re right on track. However, there are certain necessities you must ensure are in place to properly grow and scale your lending business.

Conduct a proper market study

One thing is certain, to launch a successful lending business, you must understand the market you want to play in. Considering that the UK is one of the most competitive credit markets in the world and the world’s leading financial services center, understanding this market is sacrosanct.

Therefore, you would need to study the few gaps left in the market and how you could launch and exploit this. The big question is always – what aspect of the credit market in the UK is not yet fulfilled? What are customers asking for but not getting?

Determine your loan business model

Once your research is completed, it’s important to clearly determine the kind of lending business you wish to operate. This includes deciding on the kind of loans you want to focus on which could be personal loans, SME loans, payday loans or any kind of specialized lending services.

Narrowing this down helps sharpen your focus as well as better plan your business. With this you can effectively study your competitors and identify opportunities that can be exploited. Estimate the size of your target market and its growth potential and craft a unique value proposition that’ll help you stand out from the competition.

Work on your business plan and financial forecast

Once you have decided on the kind of lending business you wish to run, it is time to work on your business plan and financial forecast. Asides from being important for your business registration, it helps provide a guide for your business. You would need to clearly outline your loan products, target customers and revenue streams. 

Clearly define the process of loan approval, interest rates for each product and terms of repayment. 

Your business plan should also include market analysis, marketing strategy, operational plan and clear financial projections. 

Prepare detailed financial projections including operational costs, interest rates, profit as well as loss from loan defaults. You’d also need to plan for the source of initial capital for your business,  and all of these must be properly documented for reference. 

Ensure you meet all relevant criteria

The major law governing lending in the UK is the consumer credit act of 1974 which regulates all consumer credit agreements including loans. The  Financial Conduct Authority (FCA) regulates all formal credit activities and the ecosystem in the UK. 

To kickstart your lending business, you will need to obtain necessary licenses according to the kind of lending business you wish to operate. Once you have properly worked on your business plan and financial forecasts, you can now begin your application. Find below a detailed guide on how to carry this out:

Business registration

With all information at hand, go ahead to register your business as a private limited company through Companies House, which is the CAC equivalent, responsible for company registration in the UK.

License application

With your business official registered and your business plan on hand, make an application to the FCA for a lending regulatory license on the FCA’s connect system. 

To do this, you would need the following documents:

1. Certified copy of Memorandum and Articles of Association and certificate of incorporation or registration as the case may be.
2. A non-refundable application fee, the amount of which varies depending on the type of lending activity and size of the firm.
3. Proof of Identity
4. The Consumer Credit Application Form, which contains details about your business, ownership structure, and the types of credit activities you plan to undertake
5. Fit and Proper Persons Form (Form A): Key individuals within your firm (such as directors, partners, or sole traders) need to complete this form. It assesses their fitness and propriety to carry out regulated activities.
6. Close Links Form (Form C) which applies in the case your lending company has close links with other entities (such as parent companies or subsidiaries). This helps the FCA evaluate potential conflicts of interest.
7. Financial Resources Forms (Forms E and F) which focus on your firm’s financial position. Form E is for incorporated firms, while Form F is for unincorporated firms. You’ll need to provide details about your capital, liquidity, and financial projections.
8. Systems and Controls Forms (Forms J and K) which covers your company’s systems and controls, risk management, and compliance arrangements. They help the FCA assess whether your business can operate effectively and meet regulatory requirements.
9. Business plan and Financial forecasts
10. Most recent tax compliance certificate.
11. Certified letters of recommendation from any financial institution with whom the lending business has had dealings in the last five years.
12. Any other information the FCA deems necessary to assess the applicant.

Application fee categories

The FCA has ten pricing categories, depending on the kind of permission you wish to have. These categories determine the fee you’ll pay based on the type of business you intend to operate. Here are some common types of companies and their corresponding fees:

1. Annex 1 Firms (Money Laundering Registration) – £250 (Category 1)
2. Banks and insurance firms: £500 (Category 2)
3. Claims management firms: £1,000 (Category 3)
4. Consumer credit firms:

•   Limited permission: £500 (Category 2)
•   Full permission: The fee will be higher, and the pricing category depends on the regulated activities you intend to carry out.

5. Credit unions, CFOs, and NFP debt firms: Fee varies based on the type of permission.
6. Crypto asset firms: Fee varies.
7. Intermediaries: Fee varies.
8. Payment services and E-Money firms: Fee varies.
9. Wholesale markets firms: Fee varies.

For full permission as a consumer credit lender, the fee depends on the specific type of lending activity:

• Mainstream consumer credit lender: £5,000 (Category 5)
• High-cost lender: £10,000 (Category 6)
• Motor finance provider: £5,000 (Category 5)
• Retail finance provider: £5,000 (Category 5)

Other mandatory submissions

Lenders must also register with His Majesty’s Revenue and Customs (HMRC) for tax purposes and may need to register with The Pensions Regulator if employing staff in the UK.

Timeline

The timeline for registering a company in the UK is typically 24 hours online, while obtaining a regulatory license from the FCA can range from 6 to 12 months depending on the complexity of the application and the type of lending activities.

Build your lending system

It’s up to you to build your software from scratch or to make use of a SaaS loan management system. However, if you’re gunning for a time and cost effective application, you should opt for a loan management software.

Ensure the software supports scalability, security, and regulatory compliance with essential functionalities such as Know Your Customer (KYC), loan origination, credit assessment, customer management, and loan collection.

Feature read: Meet Adjutor: Your critical support for making better credit decisions

Also, ensure that there are robust security measures in check to protect customer data and prevent fraud and loss of money. With your lending systems set, ensure customers can reach out to you if they encounter any issues and get quick and effective solutions to their queries and issues. 

For this, Lendsqr has got you covered. With our cost effective loan management system, you can start lending within 10 minutes of signup!

Get set, ready, and lend!

Once all of these are set up for your loan business in UK, you are good to go! Start lending like a pro. If you have any enquiries, feel free to reach out to us via [email protected] and we’ll be happy to provide you with all the information you need.