4 Ways to Finance a Microenterprise

To start most microenterprises, some capital investment is needed. Those with a good line of credit or with assets to serve as collateral can apply for and receive a loan from a local bank or lending institution. In most cases, this is not an option for the poorest of the poor. They don’t have the physical or social capital, in most cases, to obtain a loan. Besides tapping into their existing savings/reserves, how do they get lump sums of cash?

  1. Family and Friends – By far the most common form of resource accumulation is from loans through the extended family and close relationships. It is not uncommon for an extended family to “invest” in the education of a promising child for perceived future benefits to all. When a “lump sum” investment is needed to buy a sewing machine, tools for trade, or restock the shelf of a home-based grocery, family and close relationships typically are the first line of asking.
  2. Loans from individuals or loan sharks – I hesitate to use the word “loan shark” because every culture has them and they do play a vital role in community finances. As an outsider, I see this person as a negative. However, many in the communities we work see this person as a blessing. Even though I would tend to see the exploitative nature of a person like this (sometimes charging interest compounded on a high, daily rate), they do play a role in helping with access to needed lump sums of cash.
  3. Rotating loan systems and community groups – Most cultures and places have some form of this system. The basic idea is that a group of people come together and contribute a certain amount of money to the community “kitty” periodically. They then “loan” lump sums of their accumulated funds to members for microenterprise endeavors. Some of these groups would charge interest, have high accountability, and even pay dividends to their members at the end of the year.
  4. Selling a treasured asset – An animal raise, a piece of family jewelry, etc.,\ is often converted to cash to help finance a family’s enterprise.

There are a number of ways that people obtain lump sums of cash needed for life events as well as microenterprise. Next post, I would like to share with you one of my favorite ways that I have witnessed: Self Help Groups (SHGs).