Microfinancing is also known as micro-lending and micro-credit. It is financial credit to individual entrepreneurs and small businesses enterprises who are not able to qualify for conventional bank lending. The profit incentive for micro-lending has, historically, been a secondary factor. It has primarily had a social development mission, with favorable lending terms designed to help poor borrowers become self-sufficient. The concept of micro-financing gained global popularity through the success of the Grameen Bank in Bangladesh, according to Aid Workers Network. Established in 1976, the Grameen Bank reports providing lending service to 8 million borrowers, as of 2011.
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Establish a mission and a targeted community of individual entrepreneurs and small groups or collectives. Many classifications of microfinancing exist, according to Grameen Bank. Activity-based micro-credit can target small businesses such as agricultural or fishery operations, or textile-based start-up initiatives. Others can be gender-specific, such as the Women Self-Employment Project developed in the 1990s in Chicago to train and finance women transitioning from welfare to work to develop home-based child care businesses.
Secure adequate capitalization. Capital requirements will be based on the amount and scope of annual lending. Options for financing a for-profit entity are the owner's personal financial resources, venture capital and small business loans. If the enterprise is organized as a not-for-profit organization, which many are, federal grants might be available through such federal agencies as the U.S. Department of Agriculture. The USDA's Rural Microentrepreneur Assistance Program is one such grant opportunity.
Develop lending terms. Credit systems for microfinancing enterprises are not based on traditional banking requirements. The ability of the applicant's income-generating enterprise must make it viable to repay the loan. The social and economic background of potential customers requires a more progressive attitude and long-term commitment by the lender. Accordingly, focus on factors that evaluate an applicant business plan's or existing operation's ability to generate the income needed to repay the loan.
Hire quality personnel. Staff should have relevant education and experience in financial lending and small business assessment. They should bring creativity and respect to the enterprise mission. Look for experience in micro-lending environments. Lending agents should have effective customer service skills and be able to properly execute the objective factors developed by the organization in evaluate lending applications. Where an enterprise training component is included, instructors should have teaching experience in business-related courses and preferably have entrepreneurial or self-employment experience that provides real world application to workshops.
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