By Shreya Enjeti
Picture a small business. You own this business, and you need a loan. Your company does not quality for a federal loan, so you obtain a microloan. Microloans are loans given to small businesses instead of a bank or credit union issuing a loan. Microloans are provided to third-world countries with an above-market interest rate to entice investors. Generally, people invest in small amounts per loan which results in the investment of multiple loans. The purpose of microloans is to help impoverished people start small businesses. Borrowers create business plans so that lenders can loan money to the entrepreneur in the developing country. Many companies suffer from debt in developing countries, so microloans can aid companies with bad credit. For example, a small business in Guatemala manufactures computers. The company needs about 1,000 dollars to fix any repairs. If the business does not qualify for a traditional loan from a federal institution, the company must look for a micro-lending business. The lender negotiates with the business owner in order to transfer the funds to the small business. The image below represents the various industries of micro-lending. According to the graph, retail is the most used form of financing small businesses.
- How can you create a nonprofit out of micro-lending?
If you are passionate about a specific cause, it would be a great opportunity to create a nonprofit organization centered around micro-lending. For example, Kiva is a nonprofit organization that lends money for various causes. More specifically, Kiva supports women, families affected by COVID 19, and refugees. Many businesses are expanding due to Kiva’s support. For instance, a woman in Africa led the Abajyamugambi Tcb Group. This is a small business that sells livestock in Africa. She didn’t qualify for a traditonal loan, so Kiva decided to lend money in order to support her business.
- How to start a micro-lending business
There are many factors that need to be considered when starting a micro-lending business. For example, the initial cost of the business will provide a baseline of how money should be invested and how long it will take to break even. In addition, it is important to figure out your target market. Taxes are an important factor in creating a business since entrepreneurs must register for federal and state taxes. In order to ensure efficiency, you should create a separate bank account just for the business. As a result, your company will appear more professional. Even if your company is successful, it is necessary to track the expenses and the company’s income annually. Lastly, hire commercial insurance and take time to establish your company’s brand. In addition to a website, social media can be utilized to promote the compnany’s goal.
- Why is micro-lending important to economies in India?
Micro-lending is mainly used in developing countries including India and Africa. If I could alter one factor about the economy, I would include more opportunities for micro-lending in the United States. Paday loans are short-term loans that charge a high interest rate. Generally, payday loans are difficult to manage since the conditions tend to favor the lendor. However, nonprofit organizations will not take advantage of impoverished communities. Therefore, it would be beneficial for the United States to promote nonprofits that support micro-lending; many individuals will receive loans with lower interest rates resulting in less debt. Furthermore, the micro-lending market in India is expected to increase by forty percent through 2025. Microfinancing is important to the development of India because impoverished individuals gain access to capital; this practice becomes an opportunity to expand small businesses in the Indian economy. In addition, microfinancing impacts the Indian community by socially and economically empowering impoverished families.
- How can micro-lending be improved?
Micro-lending is beneficial to many underprivileged communities. However, some aspects of this practice should be improved. For example, recent studies concluded that the establishment of flexibility in payment and grace periods will allow micro-lending to be more accessible. In addition, a savings account should be utilized without any required fees. For instance, Nepal allows tellers to transfer money through an individual’s home. As a result, no fee is required; the increased use of microlending in Nepal resulted in a twenty percent increase of spending on education. Furthermore, the increased use of technology for micro-lending resulted in accessibility of this practice to a larger population. Therefore, the implementation of technology allows improved savings.
