Microlending Definition and Examples

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If you've ever been online or listened to the radio, you might think it's easy to get a loan to start or grow a business. You constantly hear and see advertisements from banks offering loans for various purposes (even personal loans that you can use for anything you want). But those loans are only available if you're in the United States, part of the mainstream, and you have good credit.

What about people who don't fit that description?

For them, microlending might provide the funds they need.

What Is Microlending?

Microlending is the practice of granting small loans to people in need. These loans are generally used by entrepreneurs who are starting a business, or those who need extra cash to expand.

Microlending is unique because of the motivation behind it, the size of loans, and the people involved.

Motivation: traditional mainstream lenders are solely focused on earning a profit – charging interest (and possibly fees) that cover their costs. Microlenders are more interested in development. Some of them are certainly in it to earn a profit, but the main goal is to help small entrepreneurs who would otherwise not be able to borrow. Microlending organizations might also provide coaching and training (they teach these entrepreneurs how to run a successful business, as opposed to just lending money and letting borrowers fend for themselves).

Loan size: microloans are small – sometimes as small as $25, although they can be much larger. In many parts of the world, $25 or $50 is enough to buy a decent supply of inventory and (with some hard work) turn a profit. But the term "micro" is relative: in the United States, the Small Business Administration (SBA) considers anything under $50,000 a microloan.

That said, the SBA reports that the average microloan they work with is for $13,000. Most traditional lenders have no interest in small loans: it costs them hundreds or thousands of dollars to underwrite small business loans (or evaluate the creditworthiness of borrowers), so there's little opportunity for them to earn a profit.

Borrowers: people who use microloans are typically not mainstream business owners in the United States. Borrowers might be self-employed, have relatively low incomes, and otherwise be unable to qualify for a loan from a traditional lender – but they have good ideas and the ability to run a successful business. Microlending is especially popular for overseas borrowers in developing nations (where the poor have no access to banking and markets are less formal than in the United States).

How to Borrow

If you're looking to borrow a small amount of money, shop among microlenders and traditional lenders to see where you can get the best deal. The SBA provides a list of local microlending organizations, which is a great place to start. It's also worth at least asking your local bank or credit union, an online lender, and peer-to-peer lenders about your eligibility to borrow as well.

Compare all of the terms before you choose a lender.

How to Lend

If you're interested in lending money to entrepreneurs, whether it's a bakery down the street or a farmer on the other side of the world, there are plenty of opportunities. An easy way to lend small amounts of money (and not earn interest) is with Kiva.org – one of the first websites to popularize microlending. If you'd like to get more involved (Kiva.org is a hands-off approach), search out lenders in your area, starting with the SBA list linked to above.

Remember that microlending is not just about making money. In fact, you might actually lose money – borrowers might be unable to repay loans, so only lend money that you can really do without.