What is Microfinance?

What is Microfinance? alternative finance news

What is microfinance?

Are microloans the right solution for your businesses?

It is easier to get a loan for $500 million than for $5000 in today’s regulated lending environment. Sometimes your business just needs a small, short-term loan to bridge the gap.

Microfinance and Microloans may be the solution you are looking for as an alternative to bank loans. Microloans are distinct from so-called “payday” loans, which are unsecured personal loans at very high interest rates. Payday loans originated at a time when the borrower handed over a post-dated check including the amount and cost of the loan to be cashed on payday. All you had to do to qualify for those loans was to prove you had a job and thus a payday. Today payday loans are retail operations that target low-income consumers.

Microloans, on the other hand, are issued by alternative lenders, often nonprofit organizations interested in supporting community-based businesses, or private investors using peer-to-peer lending sites. They can be as small as $1,000 or occasionally up to $1 million. They can be unsecured or secured.

Microloans are a good fit for any small, short-term use of capital, including:

p2p lending of microfinancePeer-to-Peer

In P2P lending, ordinary people with money to invest use the services of a company like Prosper or Lending Club to fund small businesses loans, usually up to $50,000. You can choose any online lending site and complete a credit and/or background check. They will check that your business authentic. The better your credit, the lower the interest rate of the loan. Your FICO rate doesn’t have to be sterling, but anything below 600 may not be approved.

Be aware, even the best credit rating will result in a higher interest rate than a conventional bank loan. That’s why P2P loans are appealing for the investors, who will earn more by lending their money than getting a CD from a bank. Because these are risky loans, lenders often invest only a small amount per loan but may fund a portfolio of many dozens of microloans. So, your loan may be funded by a large number of lenders, each
contributing a small percentage of the total amount to minimize the risk.

In addition to APR, with a P2P loan you’ll also have to pay origination fees, which can hover around 4% to 5% depending on the company and your credit score. These fees are typically deducted from the loan amount, which offset the amount of money you’re actually getting.

  • Online applications can put money into your account quickly
  • Comparing loan rates on several sites will not affect your credit score
  • You can get a loan with a less than stellar credit history
  • Interest rates are higher than conventional loan
  • Terms are short so weekly repayment may be required
  • Fees will be deducted from loan amount

non profit funding microfunding AFNNonprofit Funding

The Small Business Administration, Accion USA and Kiva are only a few of the nonprofit lenders that
offer microloans to support new businesses.

The SBA funds are administered through community-based nonprofits not directly by the government.
The primary features of SBA microloans are:

  • Maximum borrowing amount of $50,000
  • Maximum repayment term of six years
  • Interest rates vary by lender, but generally range from 7% to 13%

Terms will be negotiated directly with the intermediary lender, not the SBAs and will vary based on the loan amount, the needs of the borrower, the planned use of the funds, and the standards of the lender. In many cases, the lenders may prefer woman, minority or community-based businesses to fund.

Kiva, Accion and the other nonprofits in the space have different missions, favoring different types of
businesses, and loans amounts may vary.

  • Interest rates are lower because the lender is a nonprofit
  • Nonprofits provide pro bono consulting and training, including helping small businesses build
  • Loan amounts vary, but some organizations will provide up to $1 million
  • Funding process is slower
  • There may be restrictions in ways the money can be used
  • These organizations rely on grants and donations so the number of loans available and the
    amounts may vary from year to year

Watch this video for more about Microfinance

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