If you've been searching for new sources of small-business financing, you may have come across the concept of microcredit -- the practice of making very small loans to low-income people who are self-employed. The aim is to fight poverty by encouraging entrepreneurship. While microcredit has become a thriving industry in developing nations such as India, only recently has it been getting going in the U.S.
"There's a big push now," says Keith Weigelt, a management professor at Wharton. The practice has won greater attention in the U.S. since Bangladeshi microcredit pioneer Muhammed Yunas received a Nobel Peace Prize, along with the microlender Grameen Bank that he founded, in 2006. More recently, Yunas was awarded the Presidential Medal of Freedom by President Barak Obama.
But the efforts are being driven not by government but by people, often business students, involved in microfinance overseas who see a financing gap here and want to bring microfinance to the U.S., according to Weigelt, who has been involved in microfinancing for about five years and advises students working on a community-development project in Philadelphia.
While numerous resources are being marshaled in the area, microfinance has been very slow to catch on in the U.S., according to Weigelt. "I don't know if it will ever be very big. I could be wrong, but it could take a while," he says. Most efforts in the U.S. to help the poor escape poverty have involved job training. What's more, the highly regulated U.S. banking industry is much more restraining than in developing countries where most microfinancing is led by nongovernmental organizations (NGOs).
A big obstacle to microcredit's success, he says, is the very small dollar amounts of the loans. The average microloan is $300.
"A hundred dollars buys a lot more in India in terms of capital," he says. "That won't go very far here."
While the loans are bigger in the U.S, often $1,000 to $3,000, they are still quite small for many microenterprises here. "Even that won't take a lot of businesses that far," he says.
Should you decide to pursue a microloan, you may want to start by contacting local community-development organizations to try to find a microlender in your area.
Among the better-known microfinance providers in the U.S.:
- ACCION USA, an affiliate of ACCION International, a U.S.-based nonprofit, making loans in the U.S. since 1991
- Grameen America, a microfinance nonprofit, which opened in New York City in 2008
- Kiva.org, a person-to-person microfinancing Web site, which began making loans to U.S. borrowers in June
Keep in mind that most microlenders are likely to apply what's often called a "double-bottom line" lending standard, which takes into account not just the company's profits but its social impact.
"You want to show that you're helping the community grow," says Weigelt. For example, microlenders may want to see that you:
- Hire within your neighborhood.
- Upgrade your storefront.
- Buy goods and services from other area businesses.
"They'll want to see that the money is flowing within the community and helping the local community, he says.