What Is Micro-Lending?
Micro-lending is the newest fad for investors looking to expand their charitable reach. According to Maryland Capital “micro-lending is the extension of very small loans (microloans) to the unemployed, to poor entrepreneurs, and to others living in poverty that are not considered bankable.” Essentially, lenders give out small loans, usually less than $25,000 total, to people without much or any collateral who want to start a business.
How Do Micro-Loans Work?
Micro-loans are made through funds such as ACCION, one of the largest micro-finance institutions out there. A traditional loan is unavailable to most who qualify for micro-loans. Without these micro-financing options, many entrepreneurs wouldn’t be able to create successful businesses and support themselves. In the United States, there are an estimated 13.1 million micro-entrepreneurs. In order to handle the enormous number of hopeful entrepreneurs who apply for micro-financing, community finance organizations issue funds that have been given to them by the Small Business Administration. These loans are to be used for several types of business expenses but not for debt consolidation or to purchase real estate.
Kiva, a micro-lending intermediary, helps entrepreneurs in third world countries. Kiva works with micro-finance institutions to provide loans to counties without traditional banking systems. Kiva averages $2.5 million dollars in micro-loans each week. Kiva’s funding is responsible for incredible improvements in hygiene and lifestyle for struggling communities abroad. One entrepreneur in Nairobi, Pamela, used a micro-loan from Kiva to fund her own jewelry shop, which donates 50% of its profits back to women in her community diagnosed with HIV.
If you want to be a part of Kiva’s amazing efforts, all you have to do is visit their website. You can browse through thousands of stories and ideas and decide which entrepreneur you would like to donate to and watch your entrepreneur’s success. As your entrepreneur’s company begins to grow, they will start to repay the loan. The one caveat is that your loan is not guaranteed to be paid back. People who invest in micro-lending understand their loans may not be paid back and typically invest as a charitable donation.
How Can I Use A Micro-Loan For My Startup?
So now that you know all about the inner workings of micro-loans, how can you use one for your startup? First, figure out how much money you’ll need and if you’ll be able to make monthly payments. Next, find a micro-lender in your area. The Small Business Administration has resources to help connect micro-lenders and entrepreneurs. Be prepared to present your business plan to these lenders. Once you receive your loan, you will be well on your way to building your new business.
Would you like more information on financing for startups? Check out this post on Crowdfunding for Startups to explore your options.
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