Imagine driving to the bank in your new Lexus, dressed accordingly, meeting with a bank loan officer and discussing your 5 years old business, your college degree, ok credit score, net worth of $500k and your business generating $50k a year in cash flow and asking to borrow $10,000. Do you think you will get that loan?
Now – for a moment pretend that you are a poor goat herder walking into town to get a loan , you don’t have any money to open a savings account with, you don’t have any collateral to secure a loan with, you don’t have a credit record as you have never been formally employed and you’ve never taken out a loan before. Also consider that you might even be unable to complete the necessary paperwork as you are illiterate. You earn about $1/day, and you want a loan of $250 to buy more goats to grow your business. Do you think you will get the loan? Due to Micro financing the goat herder may get the loan before the Lexus college graduate.
Many of us Entrepreneurs and Small businessmen/women donate time and or money to various causes or needs. I have been involved with Kiva since 2007. Kiva provides microfinance to Third World Entrepreneurs to help them grow their business. Kiva was founded by 2 former 20 something year olds that were former employees of TIVO and PAYPAL. Microfinance is the supply of loans, savings, and other basic financial services to the poor. As the financial services of microfinance usually involve small amounts of money – small loans, small savings etc. – the term “microfinance” helps to differentiate these services from those which formal banks provide. Why are they small? Someone who doesn’t have a lot of money isn’t likely to want to take out a $5,000 loan, or be able to open a savings account with an opening balance of $1,000. Hence – “micro.”
These are small loans, multiple lenders will “pool” their loans to come up with a lump sum to provide to the Entrepreneur. Again most of the Entrepreneurs I have loaned money to over the last 4 years earn less than $1/day. When an entrepreneur pays off a loan, I reloan those moneys to another. So far I have loaned to 18 different entrepreneurs and repayment of loans have been 100%. Since 2005 Kiva as a group has loaned almost $150,000,000 to almost 400,000 Entrepreneurs and repayment has been 98.27%. Why can this organization have such success in getting loans repaid from those with so little and banks in our “developed nations” loaning to those with abundant resources have problems so significant that these banks need a “bailout” from their government and ultimately taxpayers. Is it the conventional bank that is doing something wrong? Are they loaning to the wrong people on a consistent basis? How much of the blame falls on those that are requesting the loan?
Currently how many good entrepreneurs and small business are not able to get loans as a result of mistakes made by conventional banks in the past. It seems to me that banks tend to over respond to problems. Obviously if you are a lender and want to have no loans default and you loan no money – you can achieve your goal.
As a business broker I see the need for lending to allow buyers to finance the acquisition of buying a business. I also see income statements and balances sheets of reasonable small businesses that are using credit cards to help finance their businesses. It is hard for me to understand how our economy is benefiting by having small business owners take these “whatever is necessary” financing steps when traditional prudent lending to small businesses could truly be our fastest way to our economic recovery.
The banks reduce/tighten their lending, the need for small business financing continues, higher interest is being paid through credit card financing, non-conventional means, and when does that higher expense cause employee reductions. Small business could divert money from high interest payments to investments and improvements that actually improve their business and create jobs.
Why can the goat herder get a loan and the Print Shop owner not? Or maybe if I were a banker I could ask why does the goat herder pay off his loans and the Lexus driving College Graduate default? I understand there is a lot more that goes on between the comparison of a conventional bank and micro finance – but maybe conventional banks could learn something from Micro finance groups such as Kiva.
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