In the United States, a whopping 543,000 new businesses are launched each month. Sadly, half of all start-ups aren’t able to keep their doors open for more than five years. The failure of many small businesses is due, in large part, to lack of funding.
In the last several years, however, there has been a surge of microfinance institutions popping up across the United States, offering a solution to this problem by issuing microloans.
A microloan is defined as a very small, short-term loan with a low interest rate, usually extended to a start-up company or self-employed person. Typically, these loans do not exceed $35,000.
Microloans started as a solution for impoverished borrowers in underdeveloped countries. These borrowers typically lacked collateral, steady employment and a verifiable credit history, making them a difficult candidate for traditional financing options. Microloans have been successful in helping to support entrepreneurship and encourage economic growth in these developing nations.
In more recent years, microlenders have been establishing themselves all across the United States. According to the 2009 Microfinance Information Exchange study, almost 1,100 microfinance institutions were identified and shown to collectively serve more than 74 million borrowers with $38 billion in loans. Some microlenders are finding creative ways to improve and streamline this already simple process by offering unique microlending services.
1. TrustLeaf.com: Daniel Lieser, co-founder and development manager for TrustLeaf.com, extends microloans through crowdsourcing. What makes TrustLeaf.com unique is that business owners only borrow from friends and family. Their campaigns are not publicly available. This protects the borrower’s privacy.
Borrowers simply set up a campaign on Trustleaf’s site, providing all the necessary information about their business. They then select loan terms. Potential borrowers are able to pick from a few lending options with different interest rates, minimum amount due,and various repayment terms. The borrower and the lender come to an agreement about which loan terms make the most sense for both parties.
Once the borrower has set up their campaign, they can invite friends and family to view the campaign. “Friends and family don’t like to haggle because it makes them uncomfortable,” said Lieser. “Having this system in place prevents those awkward conversations of attempting to collect money when it’s due because it’s all laid out on our platform. Funding comes straight from the lender, a peer-to-peer system.”
2. PayPal Working Capital. PayPal currently has more than 152 million active accounts, processing more than nine million payments on any given day. Last year, they launched PayPal Working Capital, offering microloans to a select number of businesses. Loans offered through this program range from $5,000 to $60,000.
Paypal Working Capital is unique because loan repayments are based on a fixed percentage of total monthly business sales, creating flexibility for a borrower whose sales patterns are difficult to predict. In addition, the deciding factor in extending a line of credit to a business is their sales history within PayPal, so no credit check is performed.
3. Bitcoin Brands. Peter Klampka, CEO of Bitcoin Brands Inc, is a forward thinker. He foresees Bitcoins being utilized as a means for extending microloans. Bitcoins are digital currency you can send through the Internet. They are universal, have the lowest transfer fees, almost zero time restrictions and have the fastest transfer rate compared to traditional currency loans and transactions.
Bitcoins can also be sent from one mobile phone to another. “With a micro-transaction, I can text you that money and you have it in minutes,” said Klampka. “It’s fast, cheap and can be universally accepted from anyone at any time.”
Bitcoins are quickly gaining public acceptance. Overstock, Expedia and thousands of small vendors currently accept Bitcoin payments. Even forward-thinking universities are getting involved. Every student who enrolls at MIT this fall will receive $100 worth of Bitcoins.
It is clear that microloans present a competitive alternative to traditional banking institutions and are transforming lending practices. This new source of credit is creating a lifeline of capital for small businesses and helping them continue to grow, even in the most competitive of markets.