Microloans are small loans that aim to support new entrepreneurs and give funding to new business ideas.

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Is a Microloan for You?

microloansA Microloan is a small loan offered to someone or a group of people in need. Microloans are generally helpful to entrepreneurs who are just starting out and need extra cash to expand. Many microloan programs aim to support entrepreneurs in the developing countries.

Microlending is different from traditional mainstream lending in three ways: the motivation, the people involved and the size of the loans. One main aspect of microlending is the motivation behind it.

Traditional lenders are focused on earning a profit. On the other hand, microlenders’ main goal is to help emerging entrepreneurs who would otherwise not be able to borrow. The loan is geared towards development.

Microloan programs and organizations might as well provide training. Entrepreneurs are taught how to run a business. This is the opposite of other lending institutions where no training is provided for starting a business.

Kiva is one example of a microloan program that has helped millions of people get funding in 80 different countries.

How Much Can You Borrow?

Microloans are small and may sometimes start as $25. Depending on the part of the world, a microloan may be of a decent amount and still be sufficient to buy inventory and turn a profit.

However, in the U.S anything under $50,000 is considered a microloan by the Small Business Administration. People who typically use these loans are self-employed with low incomes. Thus, they are unable to qualify for a loan from banks.

How to Borrow

Now that we have covered the microloan definition, what are the steps of the microloan application process?

  • Shop among various microlenders to find the best deal. The SBA provides a detailed list of all the micro-lending organizations.
  • Ask your local bank or an online lender about your eligibility to borrow.
  • Read the fine print and compare the terms before choosing a micro lender.

There are two main ways to access microloans. They can either be offered by a single individual or a number of individuals who each contribute a portion of the total amount. They are often given to people in third world countries where small business owners cannot gain access to traditional lenders.

Since these borrowers have a high risk of default, microloans attract an “above market” rate, and this can be an enticing venture for some investors.

The Risks and Rewards of Micro Lending

It is impossible to address the microloan definition without mentioning the pros and cons. The worldwide Internet connectivity has greatly facilitated microloan programs. Lenders and borrowers can easily transact online.

The lender may end up at a loss if the borrower fails to pay because microloans are not backed up by any collateral. The credit rating of a borrower is imputed using the following data:

  • A background check
  • Repayment history if you have been offered a loan in the past

Because of the inherent risk, lenders will only offer a small loan amount. However, they may fund several other microloans, but again, in small amounts. By spreading the risk in this way, lenders ensure their portfolio is not wiped out even after some borrowers default.

Most microloans are in the form of peer to peer lending.

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