3 startups offer new “microcredit” options for entrepreneurs with big ambitions

Aug 5, 2014

4 minutes to read

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In the , a standard 543,000 new businesses are launched each month. Unfortunately, half of start-ups fail to keep their doors open for more than five years. The failure of many small enterprises is due, in large part, to lack of funding.

In recent years, however, there has been a wave of institutions cropping up across the United States, offering a solution to this problem by issuing microcredits.

A microcredit is defined as a very small short-term loan with a low interest rate, usually given to a start-up or to a self-employed person. Typically these ready does not exceed $ 35,000.

Related: A simple guide to microloans

Microcredit started as a solution for impoverished borrowers in underdeveloped countries. These borrowers generally lacked collateral, a stable job and a credit history, which makes it a difficult candidate for funding option. Microcredits have helped support entrepreneurship and encourage economic growth in these developing countries.

In recent years, micro-lenders have established themselves all over the United States. According to 2009 Microfinance Information Exchange Study, nearly 1,100 microfinance institutions have been identified and have shown that they collectively serve over 74 million borrowers with $ 38 billion in loans. Some microlenders are finding creative ways to improve and streamline this already simple process by offering unique microcredit services.

1. TrustLeaf.com: Daniel Lieser, co-founder and head of development of TrustLeaf.com, grants microcredits through crowdsourcing. What makes TrustLeaf.com unique is that owners only borrow from friends and family. Their campaigns are not accessible to the public. This protects the privacy of the borrower.

Borrowers simply set up a campaign on the Trustleaf site, providing all the necessary information about their business. They then select the loan conditions. Potential borrowers can choose from a few ready options with different interest rates, minimum amount due and various repayment terms. The borrower and the lender agree on the loan terms that make the most sense for both parties.

Related: Launch your startup with microcredits

Once the borrower sets up their campaign, they can invite their friends and family to view the campaign. “Friends and family don’t like to haggle because it makes them uncomfortable,” Lieser said. “The implementation of this system prevents these annoying conversations from trying to collect money when it’s due because everything is presented on our platform. Funding comes directly from the lender, a peer-to-peer system.

2. PayPal Working Capital. PayPal currently has over 152 million active accounts, processing over nine million payments every day. Last year they launched PayPal working capital, offering microcredits to a number of businesses. Loans available under this program range from $ 5,000 to $ 60,000.

Paypal working capital is unique in that loan repayments are based on a fixed percentage of the company’s total monthly sales, which creates flexibility for a borrower whose sales patterns are difficult to predict. Additionally, the deciding factor in granting a line of credit to a business is its sales history within PayPal, so no credit checks are performed.

3. Bitcoin brands. Peter Klampka, CEO of Bitcoin Brands Inc, is an avant-garde. He predicts that Bitcoins will be used as a means to extend microloans. Bitcoins are digital currency that you can send over the Internet. They are universal, have the lowest transfer fees, almost no time restrictions, and have the fastest transfer rate compared to traditional foreign exchange loans and transactions.

Bitcoins can also be sent from one mobile phone to another. “With a micro-transaction, I can text this money to you and you have it within minutes,” Klampka said. “It’s fast, cheap, and can be universally accepted by anyone at any time. “

Bitcoins are quickly accepted by the public. Overstock, Expedia, and thousands of small vendors currently accept Bitcoin payments. Even avant-garde universities are getting involved. Each student who enrolls at MIT this fall will receive $ 100 of Bitcoins.

It is clear that microcredits present a competitive alternative to institutions and transform lending practices. This new source of credit creates a lifeline for small businesses and helps them continue to grow, even in the most competitive markets.

Related: Microcredits make a macro difference

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