Microfinance giant Grameen Bank offers microcredit to would-be entrepreneurs. Mostly women avail themselves of micro lending organizations, but any small business owner is welcome. Could micro finance make your business dream come true?
What is Microfinance and why is Micro Lending in the News?
As compared to the billion dollar loans currently being written in Washington, microfinance is concerned with loans that are measured in hundreds of dollars, not millions or billions. Perhaps the most famous example of micro lending is Grameen Bank, a financial organization that offers microcredit for the poor.
Grameen Bank, which is very active in Bangladesh, extends microcredit to those who need a $600, $900 or $2,000 loan to start or expand their small, home based businesses. This could be a door to door cosmetics sales business, a bakery, a dog grooming business, or anything else a microfinance applicant desires to engage in.
Microcredit in the United States
Although banks are receiving copious bailouts, lending to small business owners has come to a virtual halt. Moreover, some home based businesses are so small that they would not qualify for a loan. A good many home based business entrepreneurs at or below the poverty line also lack the credit needed to apply for – and receive – an ordinary loan. With microcredit, such loans are made possible.
In New York City, Grameen affiliated Project Enterprise offers microcredit ranging from $750 to $12,000 to local residents without collateral and bad credit. In Dallas, there is the Plan Fund that provides microfinance loans and also business training for recipients of the loans.
n Philadelphia, creditworthy Jewish members of the community are invited to participate in a program from the Hebrew Free Loan Society. This is a form of micro lending that does rely heavily on creditworthiness, but it allows for loans up to $5,000 that are interest free and may be used for adoption expenses, medical bills, unemployment related costs, and also first home down payments.
These forms of micro finance fill a much needed void in the microcredit market that thus far provided a niche for the prohibitively priced payday lending operations.
Micro Lending versus Payday Loans
Payday loans have carved a niche business out of micro lending. Their small loans carry interest rates that make the microcredit so expensive that borrowers usually have to take out another loan just to cover the impact its expenses have on their weekly or monthly budgets. As a matter of fact, criticism about Grameen also abounds in India where Web India published a scathing criticism of the microfinance organization as perpetuating poverty with its high interest rates, lumping it into the same category as payday lenders and usurers.
There is, however, a serious difference between for profit payday loan institutions and microfinance organizations, such as Grameen: microcredit from Grameen and its allied organizations comes with education, information, and also a hand up on how to make the most use of the micro loan. Another aspect overlooked by the critics is the generous repayment time of usually one to two years. Micro lending with payday loan providers comes with the threat of a ruined credit profile and a repayment time measured in weeks, not necessarily months.
As the global economy continues to be plagued by bank failures and unwillingness to part with funds to poverty stricken entrepreneurs, micro lending may be the next best thing for aspiring home based business owners who are underserved by the existing lending institutions.