For the last 20 years or so, microfinance has brought financial services to millions of people who were previously ignored by traditional financial institutions. More recently the practice has attracted slightly larger small businesses that saw it as a means to circumvent credit tightening from traditional lending institutions.
If you’re considering using the services of a microfinance institution (MFI) or taking out a micro-loan from any source, first be sure you know exactly how much you need in order to prevent under- or over-borrowing. Once you know precisely what you need and how much, there are a few other considerations to take into account before you sign anything.
First, watch the interest rates as they tend to be much higher than the norm in order to offset the higher risk lenders must take. Second, pay close attention to payment dates and final payment due. Balloon payments at the end of the loan are fairly common and it can be tough to pay that lump sum. Make sure you know exactly how much you’ll have to repay and by when. Do not expect the lender to protect your financial well being. Instead, plan carefully and thereby protect yourself.
Most small businesses think of offshore micro financing organizations first, simply because those tend to be better known and often come up on search engines first.
But it would be a mistake to overlook microfinance options from more traditional sources, such as a local lending institution or your government. One example of government-based microfinance options is the U.S. Department of Agriculture (USDA) Farm Service Agency (FSA) micro loan program. These microloans “are direct farm operating loans with a shortened application process and reduced paperwork designed to meet the needs of smaller, non-traditional, and niche type operations.”
Another example of a government-based microfinance program is the U.S. Small Business Administration’s (SBA) microloan program. The official website describes the program as “small, short-term loans to small business concerns and certain types of not-for-profit child-care centers.” The funds are distributed on a local level via intermediaries who have varying rules and collateral requirements. To find an SBA intermediary in your area where you can apply, contact your local SBA district office.
Choosing to borrow from a solid source that is closer to home is important because like all financial services in modern times, the micro finance practice ran afoul in places. In India, Bosniaand Nicaragua, as well as others, microfinance went too far, too fast and borrowers found themselves sinking in debt. In India new regulations are tightening microlenders’ ability to lend and collect which is affecting the availability of loans there.
In response to that fairly widespread problem a small group of investors and members of the industry teamed with the Consultative Group to Assist the Poor (CGAP), a microfinance center hosted at the World Bank, and the Center for Financial Inclusion at Accion to form the Smart Campaign to provide borrower protections.
As part of that effort, the group recently introduced a Client Protection Certification which certifies that banks and other lenders do proactively guard the financial well-being of their clients. Since the certification just became available in January 2013, the list of certified microfinance organizations at the moment is quite short but observers expect it to grow relatively quickly.
A surge in certified organizations is expected because as Elisabeth Rhyne, managing director at the Center for Financial Inclusion, wrote in her Huffington Post article: “Over 1,100 microfinance institutions and over 2,200 additional individuals and organizations (e.g., investors, donors, and networks) have endorsed the Smart Campaign principles.” Given certification is a Smart campaign initiative, it is reasonable to assume that many of its members will hurry to obtain certification.
Certainly if you are considering a microfinance institution or a micro-loan from any offshore lender, you would be wise to check to see if they are certified since that means they successfully passed or exceeded 30 standards as verified by one of four Smart Campaign certifiers: Planet Rating, Microfinanza, M-CRIL and MicroRate. But you can also check offshore lender ratings on the certifiers’ websites such as the one on Planet Rating or the one on MicroRate.
Pam Baker is the author of eight books and hundreds of technology articles published daily in leading online and print publications. She is a member of the National Press Club (NPC) and the Internet Press Guild (IPG). You can reach her or follow her on Twitter and on Google+.