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Microfinance, Women and Minority Business Financing

Microfinance, or microcredit​, refers to the provision of small dollar loans and banking service to low-income persons or groups, mainly women, who would otherwise be excluded from obtaining money. Nonprofits and financial institutions offering microfinance "most often provide lending (microloans can range from as small as $100 to as large as $25,000), many banks offer additional services, such as checking and savings accounts, and micro-insurance products; and some even provide financial and business education. Ultimately, the goal of microfinance is to give impoverished people an opportunity to become self-sufficient."

The Civil Rights Congress (CRC)—a litigation and defense organization founded in 1946 to advocate for the rights of African Americans, workers, and dissidents— established a bail fund to make “bail available to persons charged with political crimes.” The fund "was made up entirely of contributions from sympathetic members of the community and any losses were collectively shared. By July 1951, the fund had amassed around $770,000 ($7,568,152.31 in today's dollars) from nearly four thousand supporters." It was, in other words, funded by the crowd. In the 1970's, one of the first microfinance institutions to grow to global scale was the Grameen Bank, started in Bangladesh by Muhammad Yunus. Mr Yunus began his efforts in 1976. have no other access to financial services.

Several organizations offer microcredit services in the US.

To help you along, we've included data on the best microcredit sites for women and minority businesses.

Basics - Microcredit lenders make very small amounts of money available to individuals. According to one survey, in 2016, 72 microcredit organizations nationwide made $145.7 million available to 55,210 individuals and 24,455 businesses. 24% of these went to African Americans, 27% to Hispanics, and 9% to Asians. Women were 55% of the borrowers. These are good numbers, but, remember, there are 300 million people and 28 million businesses in the US.

The impact of a microloans of $100 or so is really just enough to cover basic needs, like food and shelter for a very short time period - a day or a week. This may not help borrowers gain independence, but may keep them working in subsistence-level trades, and keep in mind that the industry is dominated by firms with ties to large, mainstream financial institutions and foundations, the same ones responsible (in part) for the discrimination that leads to the need for new approaches like microfinance. Still, if thsi is your only option, give them a shot.

Benefits of microcredit financing

  • Access. You can actually get this credit. Microcredit finance firms will also typically do everything they can to help your firm.
  • Most microlenders provide free consulting and training, designed to help small businesses build credit..
  • Impact focused, so profit is not the main objective for most good microlenders.
  • Will tend to be less racially or gender biased than mainstream firms.

As opposed to venture capital, microcredit is easy money to get, especially for women and minority firms. The problems is that it may not be enough to free you from the problems that led you to look for financing in the first place.

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Features of Microfinance

Most organizations providing microfinance also provide a number of support services, from basic finance—helping with managing bank checking and savings accounts—to providing classes on small business topics, like "bookkeeping, cash-flow management, and technical or professional skills, like accounting.

Unlike typical financing options and institutions, in which the lender is primarily concerned with profits and making sure the borrower has enough collateral to cover a given loan, many (but not all) microfinance organizations "focus on helping entrepreneurs to succeed."

Manageable Loan Sizes

Microcredit loans can range from $500 to $1 million, so there is a great deal of flexibility.

Control

Microcredit borrowing does not require a borrower to give up ownership of control of their venture.

Requirement to participate in a community

The best microfinance organizations will rely on peer pressure - the desire to look god in the eyes of your peers - to help lower default and nonpayment rates.

Community Focus

In keeping with the crowdfunded nature of this form of financing, most microcredit organizations will be geographically focused. This is one reason why they tend to be less discriminatory.

Eligibility Criteria for Microcredit

Most microcredit lenders have a specific geographic focus. Why? So that they can help...and so that they can keep an eye on the money.

To make the best use of this resource, we suggest you research specific microfinance firms to find out exactly what they look for when it comes to eligibility.

Income/Annual Revenue

For SBA microloans, minimum of two years of business and personal income tax returns. You need to show your ability to gather the financial resources required to repay the loan.

Social Factors

"Your personal character. Your commitment and motivation to improve your business. A similar commitment to improve your credit. A good payment history with your other creditors – landlords, suppliers. Collateral you provide. If you’re a startup, you must have an alternate source of income."

Other Factors

One microlender states that "The loan must be used exclusively for your business. If you are a start-­up business, you must have another source of income to repay the loan. We require collateral equal to the amount of the loan you are requesting (a vehicle, business equipment, jewelry or real estate, not your home, contracts, Certificates of Deposit and other financial assets). We need to make sure you have the ability to make regular monthly payments, so active bankruptcy, liens and judgments are disqualifiers."

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Documentation

The following documents may be required:

  • Business Plan: "For startups, a detailed business plan and cash-flow projections will be required. Writing a business plan can also help pinpoint your professional goals and strategies for success."
  • "References. You may need a list of personal and professional references."
  • A government ID -- such as a social security number or Individual Taxpayer Identification Number (ITIN).
  • The basics: your name (or any other name you’ve ever used), address, etc. Your industry and date you started (or will start) your business. How you intend to use the funds. Basic Business Information and Permits - business operating address, entity type, and employer identification number (EIN).

Fees and charges

Many venture capital firms have no fees.

  • Types of fees

    Charges applicable

  • Rate of interest
    The interest rates for SBA Microloans vary from 6.5% to 13%.
  • Guarantee Fee
    Under the SBA Microlending program, "For startup micro-funding, an average of 20% of the project may be required as a down payment. Business acquisitions may require 10% down payment. However, in many cases, 100% financing is available with no required down payment from the borrower, assuming that all other conditions are met."
  • Processing Fee
    N/A
  • Service Fee
    N/A
  • Prepayment Fees
    N/A
  • Check Processing Fees
    N/A

Other Fees include Late Payment Fees, Closing Fees, taxes.

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Frequently Asked Questions

Minority Small Business Microfinancing Options.

As we noted above, in 2016, 72 microcredit organizations nationwide made $145.7 million available to 55,210 individuals and 24,455 businesses. 24% of these went to African Americans, 27% to Hispanics, and 9% to Asians. Women were 55% of the borrowers. Larger venture capital online lenders have not shown any particular skill in serving women or minority firms. These are good numbers, and make microcredit firms a must for women and minorities. They are not a lam dunk, however. Credit is still an issue. One microcredit fund noted that "the average credit score of borrowers we work with is 575..if your record is poor, we may ask that you get a co-­‐ signer." This particular fund is "unable to provide a loan if you have filed for Chapter 7 bankruptcy in the past two years or Chapter 12 bankruptcy in the past year." All reasonable standards.

As with venture capital and like most online lenders, microcredit firms targeting women and minority firms tend to be geographically focused. You must conduct a comprehensive review to determine if any work with women and minority businesses. If you need help, contact us.

We note that "Chicago has made loans more available to minority-owned businesses by creating two microloan enterprises through a public-private partnership. The city partially funds the project while Accion, the city’s major micro-loan lender, trained the new enterprises. Five years on, the program has provided over $2.5 million worth of loans to more than 250 minority- or women-owned businesses, supporting more than 1,000 jobs." Microfinance represents an important, but limited, option for women and minority firms. Just don't get too excited. One news report noted that "Studies have shown (microfinance) hasn’t really lifted people out of poverty. But it’s still made a difference in the lives of the poor."

Microfinance firms are not regulated unless they are part of a deposit taking entity (a bank). They may be regulated by the U.S. Securities and Exchange Commission (SEC) if they are affiliated with a venture capital, investment advisor or brokerage firm.

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We have included some forms and templates you might find helpful in your search for venture capital.

These sample funding documents are educational in nature. You will still need to review all documents with your team and with a lawyer.

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