U.S. Microfinance 101
I hear the phrase U.S. microfinance and I perk up- I’m not alone. Last week I was at a microfinance 101 meeting in New York City. The event was catered to a group of young professionals that were interested in getting involved, somehow, in U.S. microfinance. Someone asked a question about repayment systems for U.S. microloans, wondering if borrowers come into the office to make repayments or do the loan officers go “into the field” to collect? The end goal with domestic microfinance is the same as it is internationally; empower individuals to create prosperity through entrepreneurship.
To answer her question: on occasion a borrower may come into the office to drop off their payment, or a loan consultant will do a site visit. Generally speaking in the U.S. the repayment system is electronic, a monthly debit from the borrowers bank account. This sounds less compelling than the vision of a loan officer riding the entire day on a motorcycle to a rural village to collect a five dollar repayment from a loan for a cow. But, not to worry there are definitely other aspects of appeal for domestic microfinance.
Entrepreneurs are turned away from traditional U.S. banks for many reasons, maybe because of a low credit score or no score at all. They may not have a solid business plan or have not yet acquired the appropriate permits and licenses. In many cases though, the estimated $30 million unbanked Americans simply aren’t served or don’t have access to traditional banking. Many entrepreneurs just need a few tools to help them create prosperity- microfinance institutions can provide that.
Credit scores were discussed at the microfinance meeting last week. One person pointed out that a large American bank just announced that they weren’t loaning to anyone with a credit score below 800, in other words: they aren’t lending. Microfinance institutions are lending, the largest U.S. microlender requires a credit score of just 575. U.S. microfinance institutions make loans to individuals ranging from $500- $50,000. They offer loans and other products such as financial literacy to individuals from all walks of life.
It’s very common in the U.S. to have a client walk into a microfinance institution with a bag full of tiny pieces of paper and request a loan. Traditional banks would quickly turn the client away. At an MFI, a loan consultant will sit down and go through each piece of paper to create a cash flow, help create a business plan and refer the entrepreneur to other agencies to get appropriate licensing. An MFI loan consultant will do everything they can to give the borrower the credit they need.
Domestic microfinance is in a position to begin scaling up to meet the needs of more low-medium income borrowers. Individuals from all walks of life can find themselves in need of the kinds of services a U.S. MFI can offer. Services like $500 credit builder loans, or help with creating a business plan, larger loans for business capital and inventory, and other types of financial literacy services. Microfinance provides individuals with the power to be self-sufficient and to create a legacy and life of prosperity. Domestic microfinance is playing a part in fulfilling this dream for entrepreneurs from coast-to-coast.
Erica Dorn is a Kiva Fellow researching U.S. microfinance in New York City.