How Microlending is Useful for Starting Businesses

There is a lot of buzz going around the term “microlending.” It is not clear what micro financing is and who should exactly benefit from this program?

In simple terms, microlending is a form of funding that lends small amounts of cash to poor hatchling entrepreneurs to promote self-reliance and end poverty. The money entrepreneurs receive through a micro funding program forms the start-up capital for their businesses. As time passes however, merchants are expected to grow and pay back the micro loans. However, the primary objective of the loan is to boost the retailer’s income as well as that of the staff they hire.

The idea of lending finances to small businesses has been in use for thousands of years, but the most recent micro financing dates back to 1983 in the Grameen Bank in Bangladesh. Muhammad Yunus, the founder of the bank, used his money to lend small loans to poor entrepreneurs in a small town called Jobra at low-interest rates. The concept quickly spread worldwide and is now adopted by many of institutions all through the world. In 2006, Muhammad Yunus was awarded the Nobel Peace Prize for his great work with assisting the less fortunate through micro lending.

Nowadays, microlending has grown into a lucrative business for most profit and non-profit companies who offer micro-financing to businesses worldwide, as well as recently the United States. Some micro-financing companies like Kiva, use loans from private persons. Kiva allows anyone to loan funds in increments of $25 to merchants from their database.  For individual lenders, this provider is proving beneficial due to their rates of repayment; however, individual lenders must realize that they risk not getting paid back. Most Kiva lenders see micro financing as a generous act and don’t care to be repaid.

Although it seems like lenders prefer loaning cash to women, plenty of men still benefit from microloans courtesy of service providers like FAM. Women are well placed to set up smaller businesses and also, they look more trustworthy than men, in the eyes of the lenders, regarding loan repayments. For both male and females, it is wise to consider microloan opportunities you are eligible to if you can prove you have a great business suggestion and can pay back the loan once your business picks up.

How Microlending Works

Initially, microlending was created as a savory option to lenders who were notorious for exploiting borrowers. Small loans are offered at affordable fees to allow borrowers gain easy access. The universal average interest and fee rate is predictable at 37%, with rates shooting in some areas as high as 70%. This high-interest rate is caused by the high transaction cost of traditional micro financing processes relative to the amount of cash the lenders offer.

Most folks may argue that the high fees that come with micro-funding overpower its purpose as a tool for fighting poverty. The indisputable reality is that borrowers must make enough money to sort the principal plus the interests on the loan to ensure that borrowing the loan doesn’t make them poorer than they were earlier.