small business

Boosting a business with a microloan

Smart Spending
Highlights
  • You can lend through Web sites or organizations that support microlenders.
  • Microloans often carry interest rates as high as 30 percent to 40 percent.
  • Look for organizations that provide services to borrowers beyond just lending them money.

A microloan, typically an advance of under $100 made to an entrepreneur in an impoverished area, has become a more popular way in recent years for people to give, and received a big boost when microlending pioneer Muhammad Yunus won the Nobel Peace Prize in 2006.

Investors and donors had committed a total of $14.8 billion to microlending as of December 2008, according to research organization CGAP, which is housed at the World Bank in Washington, D.C.

Different ways to microlend

There are a variety of ways for individuals to support microlending, through either microloans or donations. You can lend through Web sites including Kiva.org and MicroPlace.org, which is owned by eBay. Or you can donate to organizations that support microlenders, such as Grameen Foundation and ACCION International.

The idea of microlending is to provide funding to a poor person who wants to start a small business in an area where capital isn't easily available. The stereotypical example is an impoverished woman starting a business that enables her to feed and school her children regularly for the first time.

"The popular perception is of small loans being made to poor people who then do some economic activity to better their lives," says David Roodman, a research fellow at the Center for Global Development in Washington, D.C.

But Roodman says it's very difficult to accurately measure the impact of the loans and compare the outcome to how the borrower would have fared without a loan.

Kiva and MircroPlace have been billed as examples of person-to-person lending, and their Web sites include pictures of entrepreneurs whom you can assist. But you aren't lending money to these people directly.

Your money goes to a microlender that lends to the entrepreneurs, and sometimes the entrepreneurs already have their loans by the time you see their pictures on the Web sites.Your loan is repaid after the microlender is repaid.

At Kiva, your $25 loans are returned without interest, and you can donate money to Kiva itself if you want. At MicroPlace, you can choose loans that return 1 percent to 3 percent or 4 percent to 6 percent.

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Microloans often carry interest rates as high as 30 percent to 40 percent, because microlenders need to do the same amount of work on the loans as they would for much larger ones. And that's still a bargain compared to local lenders who charge as much as 300 percent. The loans generally last for a year or less.

The loans have a 97 percent repayment rate, according to The Global Development Research Center.

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