HubSpot: What is microloan and is it right for you?
According to the microlender Kiva, more than 1.7 billion people worldwide are unbanked and lack access to the financial services they need. This subset of individuals and small businesses fall outside the parameters of traditional lending.
For entrepreneurs whose credit or circumstances make the risk of default high, crowdfunding or peer-to-peer, such as microcredit, offers monetary opportunities not available elsewhere. But let’s dig a little deeper.
What is microcredit?
Microcredit is the lending of small amounts, usually less than $50,000, to individuals or organizations in financial difficulty who are unable to obtain conventional loans from banks or credit unions. These modest loans can be granted by a single person or obtained from several investors who each contribute a percentage of the total amount. Typically, they have lower interest rates or capital requirements than conventional financing.
Widespread access to the internet has led to cross-border connections that weren’t possible before, making it easy for borrowers and investors around the world to find each other. This, in turn, has led to the growth of microloans.
Microloans can be used for a range of purposes related to starting a business or expanding an existing business. Examples include working capital, inventory, supplies, furniture, fixtures, machinery and equipment.
How does microcredit work?
Unlike traditional financing methods, profiting from interest and fees is not usually what microlenders seek to earn from their loans. Instead, most of these lenders are driven by a desire to help disadvantaged people in their communities.
Most are non-profit organizations and focus on lending to people or entities that align with their mission, such as women, minorities, and other underserved entrepreneurial groups. In addition to financial assistance, they often provide coaching and training to borrowers to improve the chances of success and repayment.
CDC’s Small Business Finance microloans are loans designed to meet the needs of small business owners. These loans are best for new or start-up businesses. Funds can be used for working capital, operating expenses, leasehold improvements, equipment, business acquisition, and refinancing business debt.
Compared to other non-traditional loans, CDC Small Business Finance microloans provide affordable capital. Each loan comes with 12 hours of free business advice to support long-term success.
These loans are available to businesses that cannot obtain financing from banks or credit unions. The loans are offered for terms of three to five years at fixed interest rates between 8% and 10%.
Understand that women only receive 4% of all small business loans traditional financial institutions, Grameen America provides microloans (starting at a maximum of $2,000), financial training and support to women entrepreneurs living below the poverty line.
Grameen America has a unique business model that begins with the borrower forming a group with four other like-minded women. The group then undergoes training to learn more about loans, savings and credit building.
After the training, each woman in the group opens a savings account and receives a microloan to set up her own small business. The group meets weekly to make repayments and continue their business and financial education.
An added benefit of getting financing from Grameen America is that they report microloan repayments to Experian, helping borrowers improve their credit score and qualify for more financing.
Kiva is an international non-profit organization, founded in 2005 in San Francisco, whose mission is to expand financial access to help underserved communities thrive.
With the motto “make a loan, change a life”, Kiva allows lending as little as $25, and 100% of every dollar invested on Kiva goes towards financing loans. Kiva offers interest-free microloans of up to $15,000 that are repaid over a period of up to 36 months.
Kiva microloans have paid school fees for students, helped women start businesses, enabled farmers to invest in equipment, and allowed families to pay for much-needed emergency care.
Unlike traditional bank loans, Kiva loans do not require a minimum credit score, years of cash or collateral documents. But borrowers must meet the following minimum criteria to be considered:
Both the borrower and the company must be based in the United States.
The borrower must be over 18 years old.
The borrower must use the loan for business purposes.
The borrower’s business must not be engaged in any of the following activities: multi-level marketing/direct selling; illegal activities (eg gambling, scams, etc.); or pure financial investment (e.g. stocks)
The borrower cannot currently be in foreclosure, bankruptcy or lien.
The borrower must be prepared to demonstrate his social capital by asking a small number of his friends and family for a loan.
Although Kiva does not guarantee repayment of crowdfunded loans on the Kiva website, the historical repayment rate is approximately 97%
The SBA Microloan Program offers smaller loans of up to $50,000 to help small businesses and some nonprofit daycares start and grow.
The average microloan is about $13,000, and the SBA provides funds to specially designated intermediary lenders, which are community-based nonprofit organizations with experience in lending as well as management and technical assistance.
These intermediaries administer the microcredit program for eligible borrowers. Eligibility is determined by each intermediary lender based on their own loan and credit requirements.
Generally, intermediaries require some type of guarantee as well as the business owner’s personal guarantee. The maximum repayment term allowed for an SBA microloan is six years. Interest rates are generally between 8% and 13%.
To find an approved microlender near you and apply for an SBA microloan, contact your SBA District Office.
Although microcredit has not ended global poverty, it has delivered on its promise to transform someone’s life by providing capital to start or grow a small business.
Whether microloans are right for you depends on your situation and your goals for the funds. The key is to know your options so you can make the best decision for your unique financial situation.
Originally posted Mar 9, 2022 at 7:00:00 AM, updated Mar 09, 2022
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