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All About Microfinance

How Small Loans Help Entrepreneurs Get Ahead

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"Microfinance" is the practice of granting small loans to entrepreneurs who would not ordinarily qualify for conventional bank loans. As concepts like "crowdfunding" proliferate, it's worth understanding where microloans fit into the overall picture of fundraising for small business. Here's an overview of how it works:

What is "microfinance"?

Microfinance can mean a lot of different things depending on where in the world you are and what type of industry you're in. Globally, microfinance initiatives are aimed at breaking a cycle of poverty in emerging economy -- it can, for instance, allow a woman who works in a textile mill to start, and scale, her own small business. Domestically, microfinance initiatives often serve minority and low-income communities. The practice of giving small loans outside of the conventional banking system can be a boon for a number of small businesses.

Notable microfianance stories

By their very nature, microfinance success stories are usually tiny, one- or two-person operations, and are aimed at providing livelihood for the entrepreneur and his or her family. Online MBA notes a number of amazing microfinance success stories, including convenience store owner Marcelino Lopez from Colombia, who turned a $95 loan into a thriving business, and Hurricane Katrina survivor Bernard McGraw, who put a $4,000 loan toward growing his Cajun restaurant into a self-sustaining enterprise that is able to give back to the local homeless community.

Major microfinance players

Microfinance can be as informal and local as a pawnbroker or loose confederation of businesspeople who lend to those who are in the community.

That said, there are some influential voices within the microfinance movement, and some of them are:

Kiva: Not a loan-granting body but rather an organization that connects donors with funding opportunities, Kiva works with microfinance institutions globally to provide loans to people without access to traditional banking systems.

Accion: As a leader in U.S. microfinance, Accion is committed to bringing affordable small business loans to microentrepreneurs. Accion has provided over $132 million in over 20,000 microloans since inception in 1991, helping to grow small businesses and strengthen the communities they serve.

Business Center for New Americans: This New York based organization creates a pathway to self-sufficiency for immigrants, refugees, women, and others by providing access to capital, specialized training, technical assistance and personalized coaching.

Is microfinance right for you?

Microfinance may fit into your funding scheme for your business. Ask yourself these questions to figure out if it does:

  • How much money am I looking to raise? Entrepreneurs generally decide on a fundraising approach based on how much money they need. Some "bootstrap" or invest their own money. Others go to the banks for debt financing. Private lending, that is, lending outside of banks, can work for entrepreneurs of all funding requirements, but if your needs are modest, you might consider working with an organization like Accion. More on fundraising basics.
  • Have I looked into bank lending? Debt financing is where most entrepreneurs turn first. In the simplest terms, debt financing means that you borrow money either from an institution like a bank or an individual and promise to return the principal (the amount of the loan) and an agreed-upon level of interest on that principal. In finance, debt is also referred to as "leverage."
  • What about crowdfunding? In recent years, Crowdfunding gained a lot of visibility through the platform Kickstarter, famous as a social network that invites regular users to "fund" the projects of favorite musicians, films and other creative projects. What many people don't know is that crowdfunding has been used successfully for funding small business, and as more businesses try it, new fundraising platforms are proliferating that focus on microdonations. Here's an introduction to crowdfunding.

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