How to Start Up a Microfinance Company

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Traditionally, microfinance companies provided small loans and other services to individuals who were unemployed or had limited resources. Over the past years, these services become popular among entrepreneurs that may not qualify for traditional bank loans and need money to pay their bills or cover ongoing expenses. If you have in-depth knowledge of the financial sector, you may start a microfinance business. This will allow you to help those in need and make a difference in your community.

TL;DR (Too Long; Didn't Read)

From credit unions and microfinance banks to non-governmental organizations, microfinance institutions come in all shapes and sizes. Before getting started, choose a business model that aligns with your goals and define your audience. Consider offering specific types of financial products and services, such as microloans for startups.

Overview of the Microfinance Market

Nearly 140 million borrowers worldwide received funding from microfinance companies in 2018. Rural borrowers accounted for about 65% of that number, reports the Microfinance Barometer. Currently, more than 10,000 companies operate in this market. Yet, the industry is still misunderstood or poorly perceived by the general public.

Microfinance institutions have anywhere from 100 to six million clients and may include micro-finance banks, savings and credit cooperatives, non-governmental organizations and other legal entities. Their services appeal to marginalized populations and low-income individuals. Many of these companies also offer financial training and programs aimed at reducing poverty rates. Some receive funding from major commercial banks.

The microfinance market has a 9% annual global growth rate, which is significantly higher compared to other industries. Digital technologies, such as blockchain and social media, as well as the globalization of microenterprises, have contributed to this growth. A growing number of microfinance companies are using Internet-based strategies to expand their reach, launch new products and improve the customer experience. Although the cost of providing credit remains high, the rising popularity of microlending is having positive financial and welfare impacts for low-income individuals in developing countries.

Research the Latest Industry Trends

Market analysis is paramount for any entrepreneur planning to start a microfinance business. This industry is constantly evolving, which is why you need to keep up with the latest trends and adapt to the ever-changing environment. As mentioned earlier, microfinance companies are no longer targeting only the poor. Many of these organizations are shifting to individual lending instead of group lending, offering a variety of loans to finance education, health, housing and small businesses.

The types of financial services provided by microlending companies are more diverse than ever before; insurance products, money transfers and savings accounts are just a few examples. Additionally, customers have access to longer-term loans with flexible repayment rates. Financial experts estimate that a growing number of salaried workers will apply for microloans over the next years. Also, it's important to note that many microfinance institutions are now financing small- and medium-sized businesses, not just low-income individuals.

Increasingly, more non-profit microfinance companies are embracing these trends to gain market share and expand their reach. Many of them have turned into profit-seeking institutions. As an entrepreneur, you need to consider these aspects so you can choose a sustainable business model. Furthermore, you must be open to innovation and digital transformation in order to build a successful venture.

Microfinance Business Models

Before you make a business plan, research the different types of microfinance companies. Do you plan to start a microfinance bank, a credit union or a cooperative? Another option is to set up a non-governmental organization that offers microloans and other financial products to entrepreneurs, low-income families and so on. Each business model has different legal implications.

A microfinance bank, for example, involves higher costs and requires more paperwork than a credit union. In addition to a general business license, you may need a banking license and one for trust and powers (if you wish to offer trust department services or other fiduciary services). The legal requirements are slightly different for credit unions. The state of Florida, for instance, requires them to have a National Credit Union Share Insurance Fund (NCUSIF) insurance policy besides business licenses and permits.

Starting this kind of business comes with its challenges, but you can mitigate the risks by hiring an attorney. He or she will tell you what documents are needed to achieve legal compliances and avoid hefty fines. Depending on the state, you may need a microlending license, consulting contract documents, non-disclosure agreements, deposit insurance, credit insurance, risk insurance, payment protection insurance and more. These requirements vary among states, so your best bet is to consult an experienced law firm.

Draft a Microfinance Business Plan

With more than 10,000 microfinance institutions, the competition can be tough in this industry. Therefore, you need a solid business plan and a well-thought-out marketing strategy. Analyze the market, define your target audience and assess your startup costs before getting started and then put everything in writing. Your microfinance business plan should cover the following aspects:

  • Overview of the microfinance market, key industry players and trends
  • Market and competitive analysis
  • Company description
  • Financial products and services
  • Mission and goals
  • Strategy and implementation
  • Potential opportunities and threats
  • Regulatory policies
  • Minimum capital requirements
  • Sources of income
  • Financial projections
  • Management
  • Sales and marketing strategy
  • Pricing strategy
  • Payment options

Determine what products and services you want to offer. Unlike microcredit companies, which only offer small loans, microfinance institutions typically provide a wide range of financial products, such as savings and pension plans, money transfers and insurance policies. To put it simply, microcredit is an integral component of microfinance.

Your business plan should clearly define your target audience. Decide whether you want to focus on small business owners and entrepreneurs, educational institutions, non-profit organizations or low-income borrowers in general. Use this information to develop a sales and marketing plan. Determine where you'll get the money needed to start your business, such as your savings, family funds, investors or bank loans. To increase your chances of success, you may specialize in particular products or services, such as:

  • Microloans for startups
  • Equipment and vehicle loans
  • Home equity loans
  • Commercial mortgages
  • Residential mortgages
  • Financial consulting

Register Your Business

The best legal entity to use for a microfinance business is either a limited liability company (LLC) or a general partnership. An LLC separates your personal assets from your business assets and involves less paperwork than a corporation. Additionally, it provides more flexibility and doesn't require a board of directors and other formalities.

Once you've made a decision, register your company with the state and apply for a tax ID number. Simply head over to the IRS website and fill out an application form to obtain your EIN (employer identification number). Next, open a business bank account and apply for loans or grants if you need startup capital.

Depending on your location and the type of legal entity, you may need specific licenses and permits. For example, a zoning permit may be required in certain states if you rent or purchase commercial space for your business. Again, it's recommended to reach out to an attorney. The financial industry is tightly regulated and the fines can be hefty, so don't take unnecessary risks.

Develop a Marketing Strategy

Consider your target audience as well as your products and services when drafting a marketing plan. If you're targeting local consumers, advertise your services on the TV, radio and in local newspapers. You may also send brochures and introductory letters to small businesses, schools, households and other prospective clients. Attend local business and finance events, seminars, workshops and conferences to connect with other industry professionals and grow your network.

Depending on your budget, you can also give away branded merchandise, place billboards around the city, distribute flyers or sponsor local events, such as fundraising campaigns. Another way to promote your microfinance business is to set up online advertising campaigns on Google and Facebook. In this case, it would worth hiring a marketing agency. They can leverage Facebook’s algorithm to laser-target your audience and create highly personalized ads.

Furthermore, join your local chamber of commerce to market your services and get referrals. Consider creating different packages for each type of customer. A microloan for female entrepreneurs, for example, may have different payment terms and interest rates than one for low-income households. Likewise, your online marketing efforts should be tailored to each type of client.