Credit-led Microenterprise Lending Strategies

This article and the charts are based on information published by The Aspen Institute's Self-Employment Learning Project. As financial institutions begin to move from the sidelines of microfinance, it is important to review current microlending and service products and their delivery strategies.

Evidence is growing that microenterprises—very small businesses run by self-employed individuals—can help alleviate economic deterioration and poverty in poor communities. In microenterprise development, nonprofit agencies and government entities provide loans to individuals in the hope that their small businesses can create jobs, spur new business growth, encourage the accumulation of capital, and revitalize local economic activity.

Encouraging the development of microenterprises has become part of a growing trend toward supporting "growth from within" in poor communities—that is, encouraging economic development with resources that already exist.

Today's microentrepreneurs operate businesses with fewer than five employees, have credit needs of under $25,000, and have a business net worth of generally under $25,000. A recent survey identified more than 328 microenterprise programs in 46 states. These programs assisted in the start-up or expansion of 90,000 businesses over the last eight to 10 years.

The Practice of Microenterprise

Microenterprise programs generally offer two principal services: small loans that use nontraditional underwriting standards, and training and technical assistance services. As classified by the Self-Employment Learning Project, programs fall into three distinct categories: credit-led programs that make loans to individuals, group lending (or peer lending) programs, and training-led programs. The credit-led programs tend to be directed to more moderate-income individuals and to those businesses with greater financing needs, whereas the group lending programs tend to serve lower-income people and businesses without collateral to pledge against a loan. Training and technical assistance are important in many areas, including financial management, marketing, planning and business plan development.

The goal of the credit-led strategy is to provide credit to individuals who do not meet the lending requirements of traditional credit sources, but who are capable of developing and managing their businesses with relatively little support.

The loan is the central focus of the process. Typically larger loans are made available with the maximum reaching $25,000. In some microlending programs, the loans are as small as $500. While loan terms can be short, the largest loans may range from three to seven years.

Since the inception of the credit-led strategy in the United States about a decade ago, the field is slowly growing up. No longer waiting on the sidelines, bankers are eager to investigate this emerging market and lenders and community-based financial institutions are beginning to talk about the next phase of development. The field has grown beyond the demonstration phase and is ready to define itself more clearly, push for quality performance, and claim its place within the broader community development finance field.

• Showing 'Good Faith' in Entrepreneurs
• Who are Microentrepreneurs?