A Micro loan is described as being a small business loan for small to medium enterprises (SME) in an amount under $25,000.
Different lenders have different definitions of the amount of a micro loan with some lenders considering them to be up to $100,000.
This type of loan is designed for those with low to moderate income living in rural or disadvantaged regions. The majority of micro loans are given by nonprofit or community based organizations.
A second type of micro loan are those under $1,000 dollars given to the extremely poor via charity organizations to help those at extreme disadvantages in order to establish a business in an effort to bring them out of extreme poverty. This type of micro loan is often given to families to buy live stock or to purchase something such as a sewing machine in order to establish an income for a family.
SME and micro loans are designed for those unable to meet traditional loan qualification requirements of sufficient capital or collateral assets.
The loans in general have shorter terms with fair and competitive interest rates.
Many of the lending programs are designed for those at a disadvantage such as minorities or woman-owned business. In order to receive a micro loan it is best to have a sound business plan, a repayment plan and the willingness to invest some of your own money. Lenders want to know that the applicant is serious about creating or building a business and knows the viability of said business. It also helps to know if you have been turned down by traditional financing sources such as banks.
Micro loans have become very popular in the last decade due to the success of the repayment and the social-economic benefit of these loans.
Lenders have discovered that offering these small loans, they have less default rates and are still able to make money from the interest. In 2006 Mohammad Yunus of Bangladesh received the Nobel Peace Prize as the first banker to offer micro financing or micro credit to lift people out of poverty by establishing their own source of income.
The popularity and success has lead more people to invest in micro lending and many programs have developed for people to donate to charitable organizations that offer micro financing. The financial crisis in 2008 also lead to the popularity of micro and SME loans as banks became even more restrictive in their lending requirements.
There has long been a gap in funding those who don’t meet standard criteria and the micro loan has proven successful in filling that gap. It has also started a movement toward charitable donations that are then loaned to the extreme poor who pay back the funds which are then used for the next person in an ever expanding program to relieve poverty. Minorities now have more opportunity to start or expand a business than was available 10 years ago due to micro and SME loans.