Microlending blooms as banks refuse to make small business loans

The storefront of a small business

Microlending is on the rise as banks refuse to allow small business credit and small business lending bills go nowhere in Congress. Mt. T in D.C./Flickr photo.

Microloans are emerging as an answer to the small business credit crisis. Microloans are more commonly associated with  developing countries. But microlending is on the rise in the U.S. as more small businesses are taking out microloans when the bank says no. Microlending could increase even more as a small business lending bill that would cut taxes and ease credit for small businesses stalled amid partisan feuding in the Senate.

Microlending: welcome to the third world, America

Microlending — making small loans, usually to the poor — has been one of the most effective means of financing growth in third world countries. But then the U.S. economy fell and can’t seem to get up. The New York Times reports that tight credit and the recession have increased the demand for smaller loans in the United States. Microlending is getting noticed and microloans are increasing in popularity. Kiva, which has lent more than $150 million in 53 countries, has started pilot program lending to business owners in the U.S. Grameen Bank — a microfinance group based in Bangladesh that was started by Muhammad Yunus, who won the Nobel Peace Prize for his groundbreaking work in microlending — has also widened its lending to Americans.

Small business lending bill fails

As microlenders take action to help small businesses, the U.S. Senate is sitting on its hands. Bloomberg reports that a bill addressing the lack of small business credit died July 29 when senate Democrats failed to get enough votes to consider the legislation. The bill would have provided $30 billion to banks with less than $10 billion in assets to encourage small businesses lenders. The cost of paying back those billions would decline for small business lenders as their level of lending rose. It was estimated that the small business lender package could prime $300 billion in lending. But Republicans wanted to tack extending the Bush tax cuts to the bill and said it would encourage more risky lending.

Microlending success stories

While the Senate dithers, microlending is scoring success stories. The New York Times article tells the story of a restaurant owner in Silicon Valley who saved her business with a $6,500 loan that she has three years to pay back and that carries a 6 percent interest rate. The Miami Herald reports that OUR MicroLending, a Miami-based lender, has made 764 microloans totaling $4.5 million. Its customers typically have fewer than five employees, with sales of $100,000 or less. OUR microloans range from $1,500 to $12,000 and average about $5,000. The average term is a year.