Microfinancing faces two big challenges, says Riggs: a lack of awareness among groups that would benefit from it and a shortage of organizations willing to front the funds needed to grant these loans. As he explains, “administering a $5,000 loan can be as much as administering a $50,000 loan” when you take into account the personnel and the paperwork. Moreover, these organizations don’t stand to make a lot of money from these small loans. For a for-profit business, that can be a non-starter. And that cost can hamper the efforts of nonprofits and other groups.
A third problem is the perceived risk of the recipient.
“Most small businesses start out of a patchwork quilt of funding,” explains Riggs. That quilt is made of everything from credit cards to collateral from a home (which many people lack in this recession) to help from family and friends. For companies that are seen as having a low cost to start but a high growth potential, like a digital company, an angel investor might come out of the woodwork to help. Restaurants, for example, don’t fall in this category.
So basically, if you don’t have access to friends and family with means or standing with the bank that is so stellar they can’t refuse, you’re out of luck.
“Kiva helps fill in one of those patchwork squares,” Riggs continues. For some other organizations, click here.
Kiva uses the social Web and a variety of lenders and crowdfunding sources to do its work. Ultimately, the partners involved in these endeavors, like Kiva, only get back the principal on the loan, Riggs says.
“It’s empowering to be part of someone’s journey,” says Riggs. “We hope that we can prove that even if there’s risk involved, it’s worth it to our communities.” The point has been made many times during this recession that small businesses are vital to the resuscitation of the economy. They’re also integral to building strong communities.
“In the kinds of communities we want to live in, microloans are key,” says Riggs.