Information for Borrowers
You can find a map of CAMEO microlenders here. Enter your address to find the lender nearest you!
Microlenders are usually nonprofit corporations with the mission, capacity and certifications focused on lending and micro enterprise development. Many programs have a mission to reach out to underserved populations such as low-income, minority, and women.
Microfinance organizations include:
– Organizations created through an Economic Development Administration initiative in 1960s.
– Community Finance Development Institutions (CDFI), certified by the Treasury Department.
– Subsidiaries of Certified Development Corporations that run SBA 504 loan programs.
– Local Community Economic Development Corporations
Micro-borrowers are business owners with fewer than five employees that need capital under $50,000. Traditional microfinance clients have been low-income people that do not have access to other formal financial institutions. Microfinance clients are often self-employed, household-based entrepreneurs. Their diverse Micro Enterprises include small retail shops, street vendors, artisanal manufactures, and service providers. In rural areas, the scope of microentrepreneurs go beyond farming; often they have small income-generating activities such as food processing and trade. Because of the Great Recession, microlenders are serving new populations – struggling Main Street businesses and unemployed who have turned entrepreneurial.
Each lender balances many factors when making loan decisions and each lending organization has its own processes and parameters regarding eligibility and underwriting.
Eligibility factors depend on the lending organization and its sources of capital. These factors include: location, gender, type of business, use of funds, income level of borrower, start-up versus existing businesses and size of loan.
Underwriting refers to the process that a financial service provider uses to assess the eligibility of a borrower to receive a loan. Underwriting criteria also varies. Lenders analyze business characteristics such as cash flow, years in business, profitability, credit score, collateral, and experience in the industry.
Loan terms for microloans tend to be short because the amounts are low, typically three to five years.
Interest rates for microloans are higher than traditional commercial loans because of the higher risk. While the interest rate varies from lender to lender and loan to loan, the average microloan has an 8% interest rate (per MicroTracker).
Information for Lenders
Microlenders look for sources of capital that are low to no costs (i.e. grants) so that they can lend to borrowers at a reasonable interest rate. Often, they have grant funding to subsidize the cost of their microloan programs, which may exceed the interest earned on these loan. These lenders draw on a varying mix of financing from federal, state, and local government agencies and private philanthropies.
Examples government capital include: Small Business Administration, traditional banks under Community Reinvestment Act, Community Development Block Grants, USDA Rural Development, and the Economic Development Administration, to name a few. Each source of capital comes with guidelines and eligibility requirements.
Small, start-up businesses always have had difficulty accessing commercial credit. Due to the recent economic and financial crises, traditional business credit has become even harder to obtain. Mainstream banks have all but stopped lending in amounts under $250,000. Microlenders provide capital to borrowers that may have higher risk and in amounts under $50,000. Often community-based microlenders are more interested in a business’ success than simply collecting interest. Thus, they are more amenable to restructuring a loan if necessary. Microlenders look at an entire application and consider other factors than credit history.
Community-based lenders and traditional banks both:
– expect regular monthly payments of interest and principle;
– expect the funds to be used for the purposes stated in the loan application;
– require collateral and collect it when a loan goes into default; and
– report repayment history to credit agencies.
Many models of microfinance in the U.S. and overseas exist. Some differences include:
– Loan Size: Many international microlending programs make very small loans of a few hundred dollars. In the U.S. microloans are defined as loans under $50,000.
– Interest rates: Typically, interest rates in overseas programs are much higher (15-20%) than in the U.S. (4%-10%)
– Peer Lending: Peer lending, a model where a group process underwrites and collateralizes each loan, is a common lending model overseas but is rare here.
– Application process: International programs have a simple application process. U.S. microlending organizations often require a comprehensive loan package from prospective borrowers.
– Access to alternative sources of credit: Many U.S. microenterpreneurs have access to credit cards, a common source of debt financing for business start-up and expansion. Overseas entrepreneurs do not have this option, making microlending the only option.
– Business Coaching: In the U.S. programs typically marry a microloan with business coaching and training. This is less common overseas.
- California Financial Opportunities Roundtable (CalFOR) Handbook to Capital Access.
- Read more about how micro fits into the CalFORS effort.