Almost everywhere we go we hear talk about "microbus-iness" and "microloans." But what is microlending all about? And who are the main beneficiaries? Here's a five-minute backstage tour:
What are microloans? Depending on whom you talk to, the definition varies. For some lenders, a microloan is a very small loan (starting as low as a few hundred dollars and going to perhaps $25,000) to help a self-employed person start or expand his or her business. Lenders with more capital are sometimes inclined to think of microloans as bigger -- up to as high as $50,000 or $75,000. In any case, lenders think of microloans as business loans as opposed to consumer debt or home-equity loans.
Who's making these loans? Until recently, microlending was rare in the United States. "Banks didn't think you could make money making small loans to businesses," says Gordon R. Pow, executive vice-president of Key Bank of Maine, in Augusta. A number of banks are now finding that, at least in the $20,000-and-up range, microloans can be profitable. Meanwhile, nonprofit groups have been increasingly active at the lower end of the market. The Small Business Administration is now helping fund microlending programs at 96 nonprofits in 44 states. Other nonprofits, such as Accion International, in Cambridge, Mass. (617-492-4930), are expanding their U.S. activities.
What are microloans intended for? The answer depends on who's making the loan. For example, Accion, which currently has lending programs in Tucson, Ariz., and Brooklyn, N.Y., and expects to add four more, generally makes loans for inventory and other working-capital needs. It will also lend money for purchases of computers and other equipment. Neither the SBA nor banks have any blanket restrictions on how the funds are used other than that they not be used for retiring old debt.
What rates and terms should borrowers expect? Here, too, you'll find wide variations. Some of the smallest microlenders charge interest rates roughly comparable with those on consumer credit cards and want to be paid back within six months. On the other hand, banks and nonprofit lenders working with the SBA tend to charge a couple of points fewer and extend credit for longer. (The average loan, the SBA says, is for around three years.) As for collateral, banks making microloans tend to be less demanding than they are with conventional business loans (in recognition of the fact that many of the borrowers are just beginning to establish credit). "We use a completely different set of approval criteria," says Key Bank's Pow.
For a full list of the SBA's microlenders, call your SBA district office or the agency's "answer line" at 800-827-5722. For additional information, you may want to order a copy of The Directory of Microenterprise Programs (about $12), published by the Aspen Institute, in Washington, D.C. (phone: 202-736-5851). It contains information on more than 190 U.S. microlending programs.