Microlending Taking Off in the US?

As banks tighten their lending criteria in response to the financial crisis, would-be entrepreneurs are finding that they can’t get start-up capital from the usual sources, and some small business owners are turning to microlenders like ACCION USA, Grameen America, and home-grown institutions like the Wisconsin Women’s Business Initiative.

The renewed interest in microfinance cuts two ways. Layoffs make self-employment an increasingly popular option. On the other hand, with consumer demand down, it’s a rough time to launch a business, big or small.

The Associated Press reports that demand for microloans is up in the United States – an estimated that 13,000 borrowers received microloans amounting to $100 million in 2007. (No figures yet for 2008.) Since the start of the recession, though, default rates have been on the rise, as microlenders open their doors to a steady stream of customers that have been rejected by commercial banks due to lower credit scores. As the credit crunch drags on, this trend is likely to continue. What can US microlenders do to respond to increased demand while still maintaining portfolio quality?

The new stimulus bill may be part of the answer. It includes $6 million to handle the increase in demand from micro-businesses that have been crowded out of other financing sources as a result of the credit crisis. The bill also provides $24 million for technical assistance and business training for entrepreneurs.

Business training, a feature of many US microlending programs, can improve the productivity of loans and clients’ ability to repay (see this latest study from Peru) since many new microfinance clients in the US were deemed too risky by commercial banks. Supporting entrepreneurs by helping them build business skills or simply navigating the process of getting a small business license makes sense. In the end, the value of supporting training is a question of costs versus benefits, but in this economic climate, businesses clearly need all the help they can get.