Microlending: A New Twist in Small Business Loans

February 1, 2011 - Kristin
Have you ever wondered how seemingly ordinary people with limited resources and little credit could branch out on their own and start new businesses doing what they always loved but didn’t think they could make a living on? Or how struggling citizens in poor countries manage to operate successful local restaurants or become the neighborhood tailor with nothing more than their own skills and talents?
 
One increasingly common way individuals around the world are obtaining the resources to establish new businesses of their own is through microlending — a program that brings together individual lenders with would-be entrepreneurs who are unable to borrow money in other ways, providing small loans with set terms including interest rates and repayment deadlines. The lenders put as little as $25 at risk and expect to receive repayment in full with interest, while the borrowers (whose loans might include incremental amounts of money combined from a number of different lenders) obtain the resources they need to go into business.
 
While you may or may not have any personal connection with microlending, it’s an interesting financial tool to be aware of and one that could potentially impact the world in a variety of ways in the future.
 
Some experts believe, as a recent Newsweek article suggests, that microlending could be a key strategy for helping natural disaster victims, like earthquake survivors in Haiti, get their lives back on track.
 
Small business proprietors in the United States, like a hot dog stand owner profiled in the New York Times, are increasingly turning to microlending as more institutions make these loans available and as credit is harder to come by in an uncertain economy.
 
And a recent column in the San Jose (CA) Mercury News even suggests that a microloan in a friend or family member’s name could be a good holiday gift, similar to charity gift donations in someone’s name, but with the expectation that the money will actually be repaid, and with interest.
 
New and different financing strategies all carry risks, and microlending is no exception. As with any loan, there is always a risk that the money will not be repaid or that a corrupt institution will manage the money improperly, or that any number of other scenarios could result in a loss. And borrowers risk getting involved with institutions that may not be subject to the same regulations as banks or other lenders and may not have well-established business practices and track records. Consulting with an attorney or other professional can help ensure that borrowers and lenders both are protected in microlending and other lending situations.

Maybe your retirement dream is to own and operate a quaint neighborhood café or some other small business. Could microlending be an option for you? Why or why not? Send in your comments.

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