You may have heard of “microfinance,” but what it is and what the popular perception of what it is are often two different things.
According to Forbes, “Back in 1974, a Bengali man named Muhammad Yunus created the concept of microfinance with Grameen Bank, winning him the Nobel Peace Prize in 2006 for the dramatic global impact of his idea. The World Bank estimates that more than 500 million people have benefitted from microfinance to date.” For example, using a Grameen loan, a farmer in Bangladesh might get a loan of $200 to buy cows.
Microfinance is oftentimes considered a tool to help impoverished people in developing countries. A similar institution to Grameen Bank is Kiva.org. Kiva is a person-to-person microlending organization that has provided more than $1 billion in small loans to 2.5 million entrepreneurs from 1.6 million lenders. The astonishing repayment rate is 97 percent.
The good news for small business owners is that microfinance is not just about $100 loans to poor farmers in India. As you might imagine, there are plenty of would-be entrepreneurs in the U.S. who could also use access to loans smaller than what a traditional bank may offer, but more than what someone in the developing world needs.
That is where the misperception and opportunity exists.
Microfinance has become a western option now too. Since 2008, microfinance has become an increasingly popular way to finance expansion of a small business. Microfinance loans in the U.S. certainly consist of more money than that Bengladeshi farmer might get, but are still nowhere near the larger loan minimums required by most major banks.
The idea is that people with bad credit or no credit can now be eligible to receive a microloan. Microlenders look beyond your FICO score and bank balance; instead, they tend to pay attention to things like your passion, your experience and the opportunity. Although microloan interest rates might be a little high, new standards of eligibility should get you very excited.
So, all of this begs the question: How and where do you get a microloan? Here are your options:
CDFIs: One of the best ways to get a microloan is through your local Community Development Financial Institution – or CDFI. CDFIs offer many services, such as financial advice, but what they specialize in is offering affordable loans for small businesses, nonprofits, and other moderate to low-income organizations. You will want to start this process by finding a CDFI near you. Make an appointment, bring your business plan, and come prepared to get funded.
Accion: Accion is one of the vanguards of microlending in America. They offer up to $50,000, and also offer financial education.
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The SBA: As perhaps the very best resource out there for small businesses, it is no surprise that the Small Business Administration is in the business of microfinance. The SBA does not directly offer microloans, but is a major funder of microloans for third-party lenders. Typically, the average SBA microloan sits at around $13,000, but can go as high as $50,000.
Grameen America: As you now know, Grameen Bank started out in Bangladesh. It came to the U.S. a few years back. Grameen America differs from the rest in that it requires training sessions for borrowers, and the maximum first-time loan is much more on the micro-side ($1,500).
Kiva: Kiva came to the U.S. in 2010, and is one of the major microlenders today. All loans are funded by user donations. American borrowers can be lent up to $10,000.
So yes, microloans are major help for small business the world over.
About Steve Strauss
Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest, The Small Business Bible, now out in a completely updated third edition. You can also listen to his weekly podcast, Small Business Success.© Steven D. Strauss.
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