My husband and I recently decided to open a family daycare center. In order to have children in our home we would need to significantly remodel to com ...
— Nicole & Chris, San Francisco
The term microfinance refers to a number of financial services offered to low-income individuals. The largest sector of microfinance is the administering of microloans or microcredit. The basic premise of microloans is offering small loans to entrepreneurs who wouldn’t normally qualify for bank loans, allowing them to break into the business world and build capital. Professor Muhammad Yunus, the founder of Grameen Bank and a 2006 Nobel Peace Prize recipient for his work there, was one of the first to understand that making financial resources available to “these millions of small people with their millions of small pursuits can add up to create the biggest development wonder.”
Initially developed to aid entrepreneurs in developing countries, domestic microfinance has taken off as more research shows parallels between international and American financial needs among those with no banking history. Contrary to initial skepticism, it has been shown that a small amount of seed money can provide many domestic businesses the leg up they need to see their venture flourish.
Microfinance loans are by definition smaller in scale (generally in the neighborhood of $1,000-$10,000) than most financial institutions will offer. Most traditional banks won’t even entertain a loan of less than $50,000, as it isn’t worth their time or effort. As such, microloans offer much-needed assistance for those looking for access to a small amount of capital without having to turn to high-interest options to meet their needs. To quote Professor Yunus, “High profits earned by microfinance institutions should be celebrated only if the borrowers are earning even greater profits and coming out of poverty rapidly.”
For most borrowers, however, the limiting factor isn’t so much the size of the loan as it is simply getting your foot in the door of the bank. It is estimated that nearly 30% of Americans have no banking relationship whatsoever: no credit, no savings, and no means by which to borrow money. It is generally understood that traditional banks take four things into consideration when considering loan applications: your income, your education, your credit, and your banking history. As such, this leaves many people outside the loop of conventional financing. A lack of credit is cited as one of the main reasons that more than half of new small businesses fail within their first four years.
The alternative, until very recently, was to rely on predatory lenders or take out high-interest credit cards. These outlets often charge such outrageous interest rates that they can easily trap borrowers in a cycle of not being able to make payments. In offering basic financial assistance to these “unbanked” individuals, microloans decrease dependency on predatory lenders and give entrepreneurs a fighting chance to succeed. With the increased spotlight on microfinance’s achievements, and the success of organizations such as Kiva.org and Opportunity Fund, the stage has been set for more microfinance institutions (MFIs) to join in the cause of lifting people out of poverty by allowing them the financial resources to help themselves.
Another benefit to microloans is the speed by which they can be turned around. While larger financial institutions can get bogged down in bureaucracy, smaller organizations like Copernicus Fund can work swiftly to meet the financial needs of small projects without months of delay and review.
Microloans are serving to bridge the gap for entrepreneurs who are deemed high-risk, because they can’t meet the requirements of larger financial institutions, by providing an interest rate option that is geared toward giving small business owners an opportunity to thrive. In a nutshell, microloans celebrate the entrepreneurial spirit by providing personalized, fair, and ethical financial assistance to many who wouldn’t be able to acquire it elsewhere.