Nontraditional lending more popular
Business owners who need a little help are turning to microloans.
Payday loans and microloans are becoming more popular as the recession and the credit crunch have made it more difficult for borrowers to secure financing.
Even individuals and businesses with good credit are being turned away by traditional lenders. Individuals are turning to payday loans more often, and businesses are starting to seek out microloans at a higher rate.
What is a microloan?
Microloans are loans for businesses that are generally smaller, more short-term and have higher interest rates than traditional bank loans.
Microlenders are nonprofits that historically make small loans of up to about $25,000 to owners with spotty credit or slim experience. Their money comes from private donors and sometimes the government, according to Business Week.
Story of a businessman
Much like individuals who only need a few hundred dollars are turning to payday loans for help, businesses who need less than $25,000 are discovering microloans.
Business Week tells the story of Sarwat Etman. Etman is a business owner who was looking to expand his retail operation. Despite his good credit score, a regular bank turned him away for a loan. Etman instead took out a microloan for $20,000. He agreed to pay the loan back in 48 months at 11 percent interest.
The American way
Americans are getting creative with how they handle their money.
Sara Ignas, a spokeswoman for the Association for Enterprise Opportunity, a microlending trade group, says her company has seen a big jump in demand for microloans. National statistics show that applicants for microloans with credit scores higher than 700 have jumped 43 percent.
I think this trend speaks to the resourcefulness of Americans. With traditional banks on such shaky ground, people are still finding ways to expand their businesses and handle personal financial emergencies. Microloans and payday loans are turning out to be a much needed resource for businesses and families during a changing economy.
While I agree that the recent uptick in the number of business owners turning to microloans for financing speaks to the resourcefulness of Americans, it should be clarified that microloans and payday loans are two very different options for those in need of capital.
Microlenders such as ACCION USA provide borrowers with capital at fair interest rates as well as the opportunity to improve their credit scores. By contrast, payday lenders provide quick money at interest rates that frequently top 200 percent annually, trapping payday borrowers in a cycle of debt.
Borrowers should be cautioned to thoroughly research their borrowing options when in need of business capital during the recession.
Microcredit loans and payday loans are similar, but not the same. A payday loan is geared more for a short term expense. Microcredit loans are for generating business, and how it gets used most often is for people in very poor countries to start a local business selling goods that they either buy with the purposes of selling, or materials and tools for manufacturing goods. Microcredit is starting to creep into the US, as it can provide a way for people living in poverty to start earning a bit more of a living through their own labor. Microcredit is a great tool in some cases, which is probably why one of the pioneers of it (Muhammad Yunus) won a Nobel Prize for his microcredit work.