Trends in Microlending Good for Small Businesses

The Wall Street Journal Online recently published an article highlighting the story of a New York city cab driver who was able to keep afloat in his business through a type of financing called microlending.

Microlending was formerly only popular in developing countries such as Mexico and Bangladesh. This is one positive outcome that seems to be on the rise, in part, in the wake of U.S. economic struggles: Small business owners with no credit history are still able to obtain a few thousand dollars through the process.

This type of lending offers just the right amount of support without setting up small business owners for failure: According to the Business Center for New Americans, a nonprofit lender, the default rate is only about 6%.

Little formal data exists, but bankers report some numbers that indicate the growth of microlending in the U.S. The U.S. Small Business Administration distributed about $47.5 million dollars towards microlending in the 2011 fiscal year – the largest amount in its history. Additionally, in the past ten years the average size of microloans has decreased 17% – down to $11,750; showing a trend toward even smaller loans.

Microlenders can be both for-profit and nonprofit. Nonprofits are able to fund because of private donations and support from federal and state programs.

Large US banks frequently turn down small business for loans, offering them business credit cards instead; which can create even more debt. Many small businesses striving for financial stability and independence
have been frustrated in their efforts because they have so little to fall back on in the first place; but microlending offers some hope for the future of small businesses.

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