Microloans Enable Folks in Poverty to Become Entrepreneurs

Microloans as currently practiced originated at the Grameen Bank in Bangladesh, where Nobel Prize winner Muhammad Yunus understood if he granted very small amounts of credit to poor women formed into support groups, eventually several small businesses could evolve. The groups decide which woman’s project should be funded first, with profitability and loan repayment as the goals.

This idea for supporting very small business start-ups has now spread rapidly, although India and Bangladesh are still the leaders in the microcredit movement, which may be considered as part of the microfinance industry that aims to assist very poor people. The United Nations declared 2005 the International Year of Microcredit.

Although subject to a number of criticisms about unintended side effects of these programs, overall the idea is successful and worth exploration in any community where there are people in poverty, interested in starting a small money-making business, and unable to obtain credit elsewhere.

The U.S. Small Business Administration (SBA) Microloan Program

In the United States, the microloan idea has yet to gain the visibility it has in the rest of the world. However, SBA does sponsor a microloan program. The SBA does not fund the potential entrepreneurs directly, but rather through nonprofit organizations known as intermediaries in this program. The maximum loan they may make available to any borrower is $35,000, with the average about a third of that. The maximum repayment period is 6 years. Interest rates typically are higher than those found at a mainstream financial institution.

The intermediaries for the microloan program are required to provide technical assistance (business advice) to loan recipients. In the federal U.S. program, the generalization we made above about no collateral being required doesn't hold true for the most part. However, the intermediaries each make their own policies about how they determine who is creditworthy under the microloan program. See the up-to-date list of intermediaries here.

Microloans from the Community Perspective

On this site we encourage every type of community to identify, train, and nurture its entrepreneurs. In areas of concentrated poverty, the general hopelessness seems to make a microcredit program seem like a pipe dream. But it's very real and very viable, if you're fortunate enough to live in an area served by a microcredit lender. Or if you can connect by way of the Internet.

Communities that have established an active entrepreneurship program should consider how they can channel those with smaller credit needs into a microloan program. In the U.S., banks are sometimes reluctant to service very small business loans. So if you’re in an American neighborhood with lots of needy people, see who has the smarts and drive to do a business. Set about connecting those people with an SBA microloan intermediary.

If you're in the U.S. and there is no nonprofit organization serving as a microloan intermediary in your area, you also may need to encourage a strong local group to pursue funding to administer such a program.

Despite the well-deserved hype about microloans--and I'm an enthusiast or I wouldn't write a page about them--they usually don't provide much in the way of employment opportunities for others. They typically are a way for sole proprietors to get started.

So in some respects, at least in the U.S. where fewer than 15% of people are self-employed, microloans aren't an economic development engine as much as they are a social program that takes one more person off the welfare rolls. That's still excellent policy, and one that deserves much more attention in areas where what we call community poverty has taken root.

In Sum

Microcredit is a great concept and a good SBA program, but don't expect it to work magic. Its success in the U.S. depends on the number of very poor people who take advantage of it, and the skill with which the intermediary organization manages the technical assistance, continuing education, and networking opportunity aspects of the program.

As an economic development program, it should be emphasized only in areas of concentrated poverty. In middle-class communities, more routine entrepreneurship recruitment and training will produce larger community results in terms of jobs and wages generated. But microcredit is great bet for neighborhoods and communities where lifting just one individual out of poverty, and therefore out of hopelessness and dysfunction, is a victory.

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