Working Around Bad Credit: Using Microfinance Loans
What does microfinance lending have to do with the small entrepreneur, the independent contractor, or self-employed? It turns out, plenty.
Indeed, we have some good news for you. Have you ever heard of microfinance? You might have, especially insofar as the developing world goes. Traditionally, microfinance has occurred in third-world countries where, say, a farmer gets a $100 loan to buy some cows so as to become self sufficient. That’s microfinance.
Microfinance has now come to the west, but with a twist.
There are few good things to be said about the not so Great Recession, but one is that a whole slew of new and creative methods for funding a business came out of it, including western-style microfinance. It turns out that we need microloans too, but the twist is, we tack on a zero or two.
It should not be surprising that microfinance is emerging as a viable option right now.
Because microlending in the United States is a fairly new phenomenon, the number of loans has been fairly low to date, but that too is changing. Recent changes in law have made more money available for microloans as well as for technical assistance to microlenders and as a result the number of microloans has doubled in recent years.
What Factors Are Considered Before a Microfinance Loan Is Made?
One reason you should be excited about microfinance is that lending decisions are made based on reasons beyond your FICO score, bank balance, and collateralization ability. Fortunately, microlenders look at a bigger picture, including:
- Your experience
- Your passion
- The opportunity
It should not be surprising that microfinance is emerging as a viable option right now. Credit has been tight, unemployment has been high, and people’s credit ratings have taken a hit. And many unemployed people have become accidental entrepreneurs, starting their own self-employment enterprises. The upshot is that there is a need for capital. Enter microfinance. No, microloan interest rates are not usually great, but that is the price you might have to pay.
That microfinance is finally here is the important thing.
Microloans are typically available on the local level through groups called CDFIs, for Community Development Financial Institutions. To find a microlender in your area then, begin with a Google search of the name of your city or region and “microloan” or “CDFI.”
More Solid Microfinance Options for the Self-Employed
ACCION USA: ACCION is a great group and a significant microlender. Their own website puts it best: “ACCION USA is different from a bank or credit union. ACCION USA is a microfinance organization that lends with the mission of empowering business owners with access to working capital and financial education. ACCION USA offers business loans up to $50,000 and financial education throughout the United States. Since 1991, we have specialized in working with small business owners who cannot borrow from the bank due to business type, a short length of time in business, or an insufficient credit history.”
The SBA: The SBA has been guaranteeing microloans for years. The SBA does not make the actual loan, but it does make the money available to third-party nonprofit lenders. These lenders then make loans to qualified borrowers. Although the maximum loan amount was recently raised to $50,000, the average SBA microloan is around $13,000.
Grameen Bank: The original microlender, the Grameen Bank of Bangladesh opened up shop here in the U.S. a year or two ago. Operating under the name Grameen America, the granddaddy microlender has or will open branches in New York, Omaha, San Francisco, Boston, D.C., and Charlotte. Loans are adjusted appropriately, but still are pretty micro, $1,500 or so.
Kiva: Kiva made its name by offering people the chance to loan money to poor third-world entrepreneurs through Kiva.org. Seeing a need here, Kiva came to the United States in 2010, and Kiva loans in the U.S. work much the same as Kiva loans abroad, with a few differences. Overseas, Kiva borrowers can borrow up to $3,000, whereas here the limit is $10,000 (though the average is around $5,000.)
Microlending is growing in popularity for good reasons and should definitely be on your radar for potential funding options.