How Does Microlending Work for Micro-Entrepreneurs?

Microlending is one of the most important factors to look at when considering application towards microenterprise development into your business. Microlending provides leverage towards business-minded individuals and existing micro-enterprises.

For business-minded people with a good business idea but no funds, microlending can help them in order to achieve the start of their first business. Towards existing small businesses, it can provide funds to expand on the existing business.

Risky Rewards

Featurd image How Does Microlending Work for Micro Entrepreneurs Risky Rewards - How Does Microlending Work for Micro-Entrepreneurs?

There are both risks as well as rewards that go with microlending. Microlending started with how people want to invest their money into small businesses while helping the economy grow and help dreams come true.

The lenders usually take a look at what the borrowers own. For example, if a borrower owns a home and a car, they might lower interest rates as the home can stand as collateral for the loan. Credit and background checks are always involved when considering lending money to a small business owner.

The lenders always look at previous payment history towards microloans from the borrower. Even having a good credit score, borrowers can expect to pay a bit more interest than what is traditionally applied to loans. Lenders can actually earn more interest out of microlending than keeping their money in a savings or standard investment account.

Sometimes lenders do not take collateral into consideration, which means if the borrower defaults, the lender may lose everything. When looking at websites that help lenders and borrowers to meet, you can see that most borrowers pay around 6% interest on microloans. When a borrower does not have a good credit score, they can pay up to 31.99% interest on a microloan.

Because of some of the risks that go into providing microloans, lenders will sometimes invest small amounts per loan. Sometimes more than a dozen lenders will be funding a borrower to ensure that a possible loss won’t be harmful towards their finances.

Portfolios are another way in which lenders can be sure not to lose. Portfolios exist out of many different borrowers with different credit qualities being funded by many lenders. This provides surety towards lenders that even if some of the borrowers do not succeed, they will still be making a hefty profit from the ones that do succeed and pay back their loans.

Borrowers

Featurd image How Does Microlending Work for Micro Entrepreneurs Borrowers - How Does Microlending Work for Micro-Entrepreneurs?

There are many ways in which microloans can be used to fulfill their different purposes. The first being where it was started. It was created to help people in third world countries create more jobs and become more economical. The lenders would pledge certain amounts of money to loan out to entrepreneurs in other countries with promising ideas and business goals.

There are also companies such as Kiva that give microloans for humanitarian purposes. To apply for these loans, you need to provide a business plan which details day-to-day operations and goals you would like to achieve with the business.

Many people from developed countries do not have good enough credit scores or do not need as much money as the banks can provide.