Start a Successful Microloan Investing Program

Entrepreneurs throughout the world are trying to kickstart business ideas so they can help the communities they serve. They of course need money to get started—and raising capital can be difficult, especially in developing nations.

That's where microloans can play a significant role. Through microloan investing, you may be able to help change lives while also gaining good publicity for your own business.

How microlending works

Microloan investing connects those looking to borrow a small amount of money with those looking to lend a small amount of money. This can be done at the individual level or through something like the US Small Business Administration's microloan program, which can lend up to $50,000 to small businesses and certain nonprofit childcare centers.

Microlending lets individuals and nonfinancial companies offer small loans to these entrepreneurs. The borrower can use the funds to buy a new cow for their farm, go to school, set up a small stand for their business or something similar. They'll then pay the money back to the original lender.

This concept became popular thanks to Nobel Prize winner Muhammad Yunus. He found that motivated individuals in third-world countries might only need a small amount to pull themselves out of poverty. Still, they can't simply qualify for financing to start a new business due to a lack of assets, credit history and limited borrowing options where they live. This is where microloans may help make a significant global impact.

Offering microloans

With microloans, it's often challenging to find quality borrowers and set up loans. Fortunately, the internet has made it much easier through peer-to-peer, or P2P, lending sites. These websites allow you to set up an account and start depositing money.

You then can go through the profiles of potential borrowers so you can decide where to lend money. The borrower agrees to set terms, such as a specific interest rate and payback date. They'll then pay their loan back through the platform and you can lend again.

The websites combine money from multiple lenders so you wouldn't have to fund an entire loan, depending on your budget. Research shows that consumers are interested in the way brands make an impact, not necessarily the amount they donate to a cause. So if you're helping to fund good causes, a strong pattern of giving for good may help build trust and interest with your clients.

Choosing the right platforms

One way to support entrepreneurs in developing nations is through Kiva.org. You won't earn interest on your loans, but borrowers agree to pay the money back. Kiva claims that its borrowers have a 96% repayment rate.

To be more charitable, you could donate money to nonprofits such as Accion and GlobalGiving, which set up microloans in developing nations and low-income parts of the US. You won't get the money back, but you can still promote the good cause on your business's social media platforms to help raise awareness.

If you're interested in microloan investing to make a return, you could use other platforms like Funding Circle. These P2P platforms also create loans for entrepreneurs and small business owners. They'll then pay your money back plus interest. Funding Circle notes that lenders make historical annual returns of 5% to 7% per year—putting spare cash in your business account to good use.

How microloans help your business

Microloan investing can be an effective way to help others and attract positive attention to your business. Kiva shares information about who you're helping and the good you've done. You can share this information with your clients and the media to demonstrate that your company cares about helping others. It's an easier, more cost-effective solution than launching your own charity and finding people to support.

At the same time, it's a relatively low-cost way to help others. Instead of making a donation—where the money is gone once it's out the door—you'll likely get your money back with microlending, which you can then use to support others. You'll create an ongoing pattern of good deeds that you can promote for positive press, building your brand and expanding customer loyalty.

Notably, 73% of customers say they factor in charitable giving when deciding who to do business with. Additionally, more than half would switch to a company that supports a cause they believe in. Although the primary goal of microloans is to do good, it's also possible to earn money for your business with microloan investing.

The bottom line

If you want to create a microloan program, talk with a business banker to discuss how much your company could offer and how to get started. Entrepreneurs around the world will thank you for your support, and you can share their success and yours on your company's social media platforms to inspire others to apply.