For many people, especially small business owners and minority business owners, traditional financial loans and financing plans do not work. Small loans (think less than $50,000) are often hard to get approved by banks, but data from the 2020 Small Business Credit Survey shows that 38% of businesses seeking funding want smaller loans of $50,000 or less.
For those small businesses, a loan can be what makes or breaks their business plan and helps them stay afloat professionally and personally. This is where microlending comes into play. This peer-to-peer financing has changed the way people do business in the U.S.. It has also changed the way people achieve financial security and economic empowerment worldwide, including in third-world countries.
So, what exactly is microlending?
Microlending is when a financial loan is granted to an individual or small business from another individual rather than from a bank or credit union. The structure of the loan can vary — some loans can be issued by a single individual, and sometimes they are aggregated across several individuals, with each person contributing a portion of the total loan amount.
In many cases, it is a financing solution that helps bridge the opportunity gap by providing small loans to business owners who can’t get financing from traditional sources.
There are apps and digital platforms for everything (literally everything), and microlending is no exception. Programs such as Kiva and Accion Opportunity Find help lenders dole out their funds to support business plans and small businesses around the world.
In general, there are two main reasons that someone might participate in microlending. 1) to help people in third world countries who are poor and need funding to launch their businesses. 2) to support people in need of financing in developed countries but who have failed to be approved for traditional loans from banks to support their business ventures.
In both cases, programs like Kiva and the Accion Opportunity Fund can help lenders find businesses and causes in line with their values and then lend money to support those efforts.
Clearly, these small loans can do wonders to lift up smalls business and give entrepreneurs a chance, especially in underserved communities where underbanked borrowers (often women, immigrants, and people in low-income communities) need support. Microloans can be used as working capital to purchase new equipment or to bulk up on product inventory. The ultimate goal is to allow these business owners to become financially secure and self-sufficient.
So, what is in it for the lenders?
First of all, lenders not only are paid back on their loan once the loan has matured, but they also receive interest — which is often high to protect themselves because borrowers often have low credit scores, and the risk is high. In addition, lenders know their funds support deserving entrepreneurs and people in poorer communities or third-world countries.
Companies like Kiva help to administer microloans for humanitarian purposes, aligning lenders with business and borrowers based on philanthropic goals, ensuring that their monetary impact is global and meaningful.
Furthermore, microlending can be mutually beneficial to lenders and borrowers in various ways.
Take, for example, BMC Software, a company that turned to microlending as a way to build employee engagement and help advocate for employees and their unique cultures.
Knowing that keeping their teams involved and invested in the company culture would be increasingly challenging with remote work, they launched a set of Employee Resource Groups (ERGs) in 2021 to empower, celebrate and support their employees and communities.
The groups offer a chance to bond over shared experienced and interests. Working with Kiva, a microlending platform, allows employees to invest funds as a group and make meaningful change in relevant communities worldwide. This company program helps entrepreneurs globally and brings employees together to bring about progress for underbanked borrowers.
“One of the best ways to create equity is through economic empowerment, and each of our ERGs participates in microlending through Kiva,” Rentschler explained on BMC Software’s “Business of IT” blog.
Creating economic opportunities for individuals, entrepreneurs, and small business owners is a tangible way to help in communities where financial support is needed now more than ever.
For minority individuals and small business owners seeking loans but who do not necessarily fall into the traditional fiscal borrowing bucket, microlending is an opportunity to boost their business and achieve financial stability.
Microlending is changing the way people seek loans and launch companies. While it’s not right for everyone (both lender and borrower), it’s certainly expanding financial inclusion worldwide.