What are micro loans?

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A micro loan is a loan characterized by smaller loan amounts compared to traditional financing. The micro loan category is not specified by any particular amount, but is small in relation to other loans of similar purpose. A micro loan may be as small as $25 made between one private party to an individual borrower or business. But it may also be in the form of a Small Business Administration (SBA) micro loan, which average about $13,000 but can be as much as $50,000.

Micro loans in today’s developing world most commonly refer to smaller loans made to those without access to any form of credit. Micro loans can be made between private parties or can be made by micro loan institutions providing funds made available from individual investors.

A common example of the use of a micro loan is when an individual needs to borrow $50 in order to start up their own business making crafts in an impoverished community or region. A micro lender can issue short-term funds in these smaller amounts and is repaid – typically on a weekly, biweekly or monthly basis – by the borrower, as their wares are sold to their customers.

Micro loans for entrepreneurs and start-ups

Micro loans are becoming a more frequent source of funds for entrepreneurs in the developing world, where traditional forms of credit are not available. The concept of micro lending, particularly in developing countries, is to provide individuals with opportunities and resources to rise above their poverty and improve the quality of life for borrowers and their families.

In the United States, micro loans can also be found at non-profit institutions dedicated to the unbanked, underbanked, underserved, poor and impoverished. As a micro loan is placed, the borrower learns the basics of entrepreneurship while providing for a new source of income and self-esteem. The internet has also made micro lending easier and more popular with the emergence of micro loan and crowd-funding facilitators such as Kiva.org and Prosper.com, which provide platforms for potential borrowers and investors to meet.

Micro lending has quickly become a recognized force in the worldwide consumer finance arena. In fact, the 2006 Nobel Peace Prize was awarded to Muhammad Yunus, a banker and economist in Bangladesh, for his microfinance programs. If micro lending continues to build on its recent successes, it is believed that it can have a profound and positive impact for people worldwide, particularly for entrepreneurs in developing nations and regions.

Disclaimer: NetCredit is a direct personal loan provider and does not provide financial advice, nor does it vouch for any vendor or service mentioned on our NetCredit personal finance blog or online consumer loan glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.

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