Business Capital for Microentrepreneurs: Providing Microloans

This issue of the Microenterprise Fact Sheet Series focuses on microcredit in the United States (US), summarizing its evolution, the principle methodologies, current product innovations and the institutions that offer these types of loans.

The paper states that:

• In the 1980s, non-profit organizations began to experiment with lending characterized by small loan sizes and flexible collateral requirements;
• Their efforts attracted community economic development activists eager to try strategies that targeted both personal and financial empowerment for the poor;
• However, practitioners realized that:
  • Microentrepreneurs need more credit if they are to move out of poverty,
  • Lending to the poor is more difficult in the US than in developing countries.
• Microenterprise development (MED) programs started investing more in training and technical assistance provision;
• Programs thus became either training-led or credit-led;
• Microenterprise lending methodologies are of two types:
  • Lending to individuals,
  • Peer group lending.
• Programs are:
  • Experimenting with different products to increase loan volumes in microcredit,
  • Looking for better procedures to enhance their outreach and efficiency.
• Credit-led programs perform better in covering costs and achieving the scale and efficiency that lead to self-sufficiency;
• Microlenders in the US include a diverse range of Community Development Financial Institutions.

The paper concludes that microcredit in the US is now an important tool for many institutions and programs committed to economic development. It has helped practitioners prove that the poor are bankable.