Microcredit 101

Traditional banks only loan money to the rich, says Muhammad Yunus, who founded Grameen Bank with the idea of doing just the opposite. By granting millions of small loans to poor people with no collateral, Yunus helped to establish the microcredit movement across the developing world. This revolutionary way of lending money may have had its start in poverty-stricken areas of the world, but the concept of microcredit, or microlending, is quickly finding its place in the American economy.  

Most banks don’t bother granting business loans less than $50,000 because there’s not enough profit to balance the risk, according to a recent article in The New York Times, detailing the increase of microlending in today’s tight credit, recessionary market.

By giving loans to people who wouldn’t otherwise be able to get money from traditional banks, microcredit provides options. Small-business owners can now expand their companies, buy new equipment, or just get the help they need to weather a dry spell in cash flow.

Traditional Bank Loans versus Microcredit Lending

More than $50,000

 Typically less than $35,000

Large companies

Companies with five or fewer employees

Focus on credit score

Consider an owner’s passion and commitment to the business

Collateral required

 Little to no collateral needed

Lower interest rate

 Higher interest rate (5-18%)

Opportunity Fund

In the San Francisco Bay Area, an organization called Opportunity Fund began 15 years ago with the mission of advancing the economic well-being of working people. Through financial education programs, matched savings accounts, affordable housing financing and, of course, microfinance loans, Opportunity Fund offers its clients an opportunity to take charge and a chance to change their lives, its organizers say.

Typical recipients of Opportunity Fund loans are small businesses with more than one year in business that generate enough business income to support all expenses, have good or mixed credit, and cannot qualify for a conventional bank loan. Clients include home-based businesses such as contractors, landscapers, carpet cleaners; retail-based service such as auto repair shops, hair salons, dry cleaners and chiropractors; retail stores such as wedding stores and neighborhood markets; and industrial or light manufacturing businesses.   

To date, the group has made more than $11 million in loans to the Bay Area’s micro-entrepreneurs. A recent economic study showed that Opportunity Fund’s microlending has created a ripple effect totaling more than $17 million annually in:

new wages

new spending

new tax revenue

“The economic impacts of Opportunity Fund’s loans extend far beyond the individual borrowers,” the study states. “The provision of capital to small businesses affects the economy in a number of ways. Many of these benefits, however, occur over a number of years after the loan, as businesses grow, add employees, and increase payrolls. Lending to small businesses can have an ‘evergreen’ effect, as a sustainable business by definition provides services to its customers, wages to its employees, and returns to its owners on an ongoing basis.”

There are hundreds of microlenders across the country. Find one close to you by visiting the SBA’s website.
 

Read how Muhammad Yunus turned traditional banking on its head by using microlending in his native Bangladesh.