Is Microfinancing Dead? 7 Things You Should Know About Small Dollar Financing Before Discounting It

By Karlene Sinclair-Robinson  

Microfinancing is a financing method that supports businesses and individuals globally. It is often considered the forgotten option in the world of small business access to capital solutions. Many small business owners go to their banks first, try to access ‘Angel’ or ‘Venture Capital’ first before effectively developing a business those lenders or investors can support.

Access to capital continues to be a challenge for many micro-enterprises and struggling small businesses. The inability to access much-needed funds to manage cash flow and the daily business operations continues to be a daunting issue. The inability to qualify for tradition financing continues to make its mark felt as more business owners choose to reduce their operations or close their doors. Imagine the anxiety and emotional distress these individuals experience as they face the challenges insufficient capital presents!

The knowledge that a financing method such as ‘Microlending,’ or ‘Microfinancing,’ is making a huge difference continues to show the positive outlook for this financing option. The ongoing issue though is that many of these struggling business owners are not aware of or know the value of Microfinancing.

Even though it is not as famous as the U.S. Small Business Administration financing programs, ‘Economic Injury Disaster Loan,’ (EIDL) ort the ‘Paycheck Protection Program (PPP), Microfinancing continues to be one of the best options for those with bruised credit, limited collateral, insufficient working capital, and more. There are online options to access this financing method that operates through a seamless process or what is called ‘Fintech,’ to help limit the timeline to get approved, and, eventually, funded.

There are also ‘Community Development Financial Institutions’ (CDFIs), whose mission it is to assist small, minority, women, veterans, and disadvantaged business owners get the support they need. CDFIs are often non-profit organizations that provide small business-type financing solutions to the underserved, underbanked, and the unbanked business owner. Finding such non-profit organizations starts at the local level and are often found through word-of-month.

It is my ongoing mission to share resources as I continue to help demystify ways to help micro-enterprises and small businesses at various stages. This long-time financing option should seriously be considered as part of anyone’s ‘Access to Capital’ strategic approach to building a viable business.

Here are seven (7) things to know about Microfinancing:

  1. Microfinancing is community-based financing.

This financing method consistently presents as a community-based type of financing solution, even when it is operating on a global scale. It is often operational at a local and or regional market or service area. It is vital that you pay attention to this community-based factor as many Microlenders have jurisdictional challenges based on their loan fund(s) terms and conditions, and their donor requirements.

2. Microfinancing is the solution for Microenterprises.

This option is one of the best for the underserved, underbanked, and unbanked individual seeking to start or is already in business but cannot fit the traditional financing market’s ‘ideal loan client’ status.

3. Microfinancing is not credit-score driven.

Microlenders are required to support the population that cannot walk into a bank and get the typical loans and terms that someone with great credit could. They are mandated by their financing, grant, or donor sources to use a lower credit score threshold to effectively get capital dollars into the hands of those whose credit status could jeopardize their chances of growing a business.

This option allows for credit scores as low as 550, depending on the lender and their loan criteria. Once you know what their requirements are, be sure to follow them and ask questions as you go through the process.

4. Microfinancing is not always ‘collateral’ focused.

This financing method, along with the lender source, is not always ‘collateral’ focused pursuant to the loan dollars you are seeking. If you are seeking funding, AND know you have credit issues, let the lender source know early in the process, so they can make appropriate decisions. Their approach to collateral requirements will differ from organization to organization and the loan funds they offer.

5. Microfinancing is character-based.

Character-based financing is necessary and is an important part of the relationship building process while one is seeking other people’s money. Your credit report tells a part of the story of your creditability or creditworthiness. Other ways to look at ‘character-based’ financing are understanding the need to build trust, showing up for appointments in a timely manner, and delivering according to agreed-to processes, document sharing, etc.

6. Microfinancing is the solution for fast growing Startups.

Too often, a startup owner jumpstarts their business without adequate financial support. They tend to use up all their personal savings, cash out retirement accounts, borrow from family and friends, while still coming up short with their financial needs. The opportunity to use Microfinancing is available for those who are ready and willing to provide all applicable documents and follow the lender’s process.

7. Microfinancing bridges the financing gap for the entrepreneurs.

The opportunity to use this financing method allows many small business owners to achieve their goals and overcome challenges faster. The viability of using this option as a ‘Bridge Loan’ solution can help aid the access to other much-needed capital. It can be used to improve personnel support, increase marketing budgets, deliver more effectively through increased online service support, and much more. It can be a short-term option or get access to the maximum term length their lender’s lending authorization allows for at any given time.

Finally, Microlending is not for everyone! Don’t try to use it if you do not believe you would be a good fit. However, be sure to get professional guidance before making such a decision.