I received a call this morning from John. John wants to start a payday loan business. He’s been researching the payday loan industry for 6 months. John’s question, “Should he buy a franchise?”
This particular payday loan franchise company requires John to have about $215,000 to open. This consists of a $35,000 one-time franchise fee, $65,000 for build-out, $15,000 for software, signage and miscellaneous marketing materials. This leaves roughly $100,000 “for the street.”
Finally, a 6% monthly commission must be paid to the Franchisor “on the gross revenue of the business.” That’s 6% on the gross revenue! As John explained this to me, the Franchisor has a system for payday loans – nothing else. That means, if John develops a scrap gold buying business or if John adds car title loans, or anything else for that matter, he must pay 6% on his total gross revenue; this despite the fact that the Franchisor offers zero support and expertise for these additional services.
This Franchisor cannot guarantee a specific return, but they imply John will earn 18%/month EBITDA. (This using a licensing model allowing 15% of the face amount of the loan to the consumer.) Of course, as in life, this potential return depends on a lot of factors. There are no guarantees.
So… should John purchase a franchise? With zero hesitation, I responded to John with an emphatic, “NO.”
BUT, I began to listen to the path John was on. I sensed the frustration John was experiencing. AND I sensed the answer to his initial question requires a macro perspective rather than a simple yes or no to, “Should I buy a payday loan franchise?”
For the past 6 months, John has used Google.com for keyword searches like, “how to start a payday loan business, payday loan software, payday loan industry, payday loan customer demographics, payday loan lawyer” and on and on…
He’s called and participated in demo’s of various payday loan software vendors such as eChecktrack, Answers, Epic, Azo Blue (Apogee), PLM (Infinity), Alpha Omega, IntroXL, TranDotCom, eCash, EData and more.
Additionally, John has reached out to legal counsel including Paul Soter, Claudia Calaway and Hillary Miller to discuss compliance, consumer contracts, arbitration agreements, licensing models (choice-of-law, state-by-state, offshore)… This led John to Allen Parker and the tribe model (sovereign nation), and Michael Brown at CAB Consulting (CSO to CAB transition).
John talked with the consumer data scrubbers; Clarity, DataX, CoreLogic-Teletrack. Idology, Factor Trust, and more.
And of course, John contacted a few ACH providers like Advantage Resources, LST, ACH Works and the new payday loan“wire transfer” provider introduced at OLA. ($3.00 wire transfers using the EFT Network rather than the ACH system.)
Then there are the web site builders like Frank Masotti, the lead generators, the SEO and SEM companies, outsourcing of call centers vs in-house, analytics experts, collection companies. reputation management companies…
After doing all this research and reading some of our training and start-up materials, John still didn’t have clear answers to questions such as:
Is the PDL industry saturated? Is there room for another payday loan lender? Maybe I should lend capital to an existing operator? (For example, there’s a team with 50 brick-n-mortars in 3 states offering 10% returns with personal guarantees. Or, an operator in Las Vegas with 3 locations is offering 3% per month with car titles as collateral.) Or, John wonders if he should act as a 3rd party Texas Lender by making capital available backed by a CD and an Irrevocable Letter of Credit? He’s been told he can earn 15% – 24% annually on his capital with very little risk.
John has determined there is a TON of opportunity in the payday loan – micro lending space! The puzzle for John is to figure out HOW we wants to play it based on his goals, his family situation, his existing skill set, and his appetite for risk.
So… John asks himself the following:
Internet or store or both?
How do I market? Online and off-line?
How do I deal with the evolution of borrowers using their smart phone to find my loan operation?
Do I focus solely on payday lending and cash advance?
What other products and services make sense to add to my PDL business?
Do I really need to invest in a franchise system or can I do this on my own?
I’m concerned about my family (John’s health is questionable and he has a wife and 1 child) and their ability to carry on the business should something happen to me. Would my being part of a franchise system reduce this risk and add value to my new enterprise?
Do I need legal counsel on retainer or can I rely on the Franchisor to keep me compliant?
As a Franchisee, I’ll be part of a system, a group of peers in the same industry. How valuable is this? Or, do I go on my own and rely on my state organization, FISCA, CFSA and/or OLA to educate me and help me build my business? Will I have the time and money to be part of these trade organizations?
What do you think? What would you do? For that matter, maybe you already made
the decision! What are your thoughts? What would you advise John to do? Put on your consultant hat! It’s time to give back… LEAVE A COMMENT!31 Comments so far
Richard Mayemura November 1, 2011 11:25 pm
I have been a franchisee of a major restaurant chain (El Pollo Loco), a franchisee of a small division of a bigger company (ExpressTax which was owned by HR Block), and have operated as an independent payday lender for 5 years.
Without knowing which company he is looking to become a franchisee for, my initial advise to John would be to act as an investor.
Here’s why. John, with his questionable health and wife and one child may not be able to put in the time and effort this new enterprise might require. However, from your description Jer, I would say that John seems to be a great researcher and has performed more due diligence than most. Combine the two factors, and I could see John doing far better as and investor than operator right now.
Also, as an investor, he would still be securing his wife and child’s future.
Due to the health issue and the huge % of startup cash required by the franchisor, I would advise placing my funds with an experienced operator. As an investor, John can earn SUBSTANTIAL returns and safeguard his family’s future.
As Jer has told me often, “There is no McDonalds of payday loans.” $215,000 at 3%/month or more is achievable as an investor. John just needs to continue his due-diligence and locate the right “partner.”
One thing for sure I would not touch a payday loan franchise for 250k. With his level of knowledge and health issues I would invest my money with the company offering 3% a month. 36% a year and backed by car titles seems like a no brainer. In the mean time he can attend the annual conferences to educate himself more on the industry.
admin November 1, 2011 11:58 pm
Richard, under the circumstances, I’m leaning towards the same conclusion as you. With the right situation, that $215,000 could grow substantially, John could gain additional insight into the biz, it should be less stressful on him and his family…
Of course, finding the right opportunity with tolerable risk is the next challenge!
I get a couple “deals” pitched to me every day. Separating the wheat from the chaff is time consuming :o)
As the man mentioned in the article my first instinct was the same, absolutely not do not do the franchise. Not for my own benefit but for his. As I read on I too realized there was more to it. However, I did come to the conclusion my instinct was still correct. I have seen a lot of pay day loan companies start up. (Build their sites). They are all doing well. 99% of them do it on their own. With the required 6% back no matter where the money comes from is ridiculous. Like Jer said gold buying, micro lending, auto title loans, and so forth to improve his business. Why does the franchise deserve a dime of that? They do not. If it was just 6% of the loans they seal with then fine, but not all of his business. Just my 2 cents worth!
Roger November 3, 2011 2:13 am
I would also decline to promote the idea of franchising. Having the support and expertise of a traditional franchisor would have some value but I would need to have a clear understanding as to what that support would be under this scenario. New entrants to the PD business need someone to talk things over with, and John could probably develop that relationship with someone in the industry, not necessarily located in his market. I have been surprised at the willingness of others in the industry to share. As noted, the monthly commission on gross revenue is prohibitive.
If John’s research indicates a PD loan business is vialbe in his chosen market, he should, of course, also consider correlative businesses such as title loans and/or check cashing. Each has its own set of challenges and opportunities but I question whether or not a new stand alone PD loan business can survive in many markets today.
While John’s health issues are a concern, they would be a consideration no matter what business he started. In theory, with the short term nature of the PD loan business, it would be fairly simple to shut down, if necessary. Being a capital lender is certainly a longer term proposition although I do believe there is ample opportunity in this area of our business. Lots of risk if one does not know the pitfalls. Security and transparency are very important issues here. Just one person’s opinion………….
admin November 3, 2011 2:34 am
REALLY thoughtful input, Roger! Obviously, you have expertise in the payday loan lending space. Additionally, I STRONGLY agree with your comment regarding the willingness of those of us having experience to be willing to share. I’m astounded every day by examples of this. I know “John” is evaluating everyone’s feedback. He has a tough decision to make!
Category: Payday loans