Microlending is a form of finance common in many developing nations, but mostly unknown to business owners in the U.S. This seems to be changing, however, as experts have noticed that an increasing number of small business owners are utilizing mini loans (loans of only a few thousand dollars) to fund their enterprises.
Small business finance expert Bob Coleman says that many large banks in the U.S. are shying away from small business loans, preferring to issue business credit cards instead. Mini loans are a viable alternative for many entrepreneurs, especially those who come from modest means.
Mohamed Diallo is a cabdriver in New York who wants to start a fruit-importing business. With little money to save each month and virtually no credit history, Mohamed took out a $2,000 micro loan through a nonprofit lender. He used the loan to buy his cab, and now has more flexibility to save money for his future business.
For the most part, U.S. microlenders have historically flown under the radar. But with so many people exploring new financing options in the shadow of the current economic downturn, more banks are starting to take notice. Microlenders may be for-profit or nonprofit, with nonprofit lenders typically being funded by private donors and government programs.
The U.S. Small Business Administration dispenses grants ranging from $1,000 to $1.5 million to these nonprofit microlenders, which are deemed “community development financial institutions.” In 2011, almost $47.5 million in microloans were distributed by the SBA through 170 nonprofit lenders.
Bangladeshi banker and Nobel Peace Prize recipient Muhammad Yunus founded Grameen America, one of the SBA’s many microloan partners. Grameen America has issued over 25,000 loans since 2008, with the average amount being $2,200. So far, Grameen America reports a default rate of almost zero.
Most of the for-profit microlenders in the U.S. are small banks, such as Borrego Springs Bank in California. While the average size of an SBA microloan was about $12,000 last year, most for-profit microlenders cannot afford to offer such small amounts. Because the cost of documenting and underwriting a $12,000 loan and a $12 million loan are the same, banks such as the Borrego Springs Bank consider loans of up to $50,000 to be “mini.”
Adinolfi, Joseph. “Mini Loans Feed Bigger Ambitions.” The Wall Street Journal, 9/8/12.