Markets Knows Best: US Entrepreneurs Turn To Microfinancing

A dysfunctional banking system doesn’t mean an end to transactions.

As we earlier quoted economist Steven Landsburg in the Atlantic.com in our Selling the Bailout: The Fear Factor

``So what's special about banks? According to what I keep reading, it's that without banks, nobody can borrow, and the economy grinds to a halt.

``Well, let's think about that. Banks don't lend their own money; they lend other people's (their depositors' and their stockholders'). Just because the banks disappear doesn't mean the lenders will. Borrowers will still want to borrow and lenders will still want to lend. The only question is whether they'll be able to find each other.

Exactly.

To prove the point that markets knows best, US entrepreneurs faced with a banking sector credit crunch have begun to turn to microfinancing, a practice used mostly in developing nations. This from Businessweek's "US entrepreneurs turn to microfinance"…

“We’ve written about Kiva, the microfinance site that connects lenders with entrepreneurs in the developing world who need small loans. But it looks like US entrepreneurs are increasingly turning to microloans as well, particularly now, as banks tighten lending standards.

“To be sure, microlending is a tiny, tiny piece of small business credit in the US. Microlenders tend to be small nonprofits, and all their loans combined probably wouldn’t be a blip on the portfolios of one of the big banks. That said, there’s some anecdotal evidence that it’s a growing source of credit for some very small businesses locked out of the conventional credit market.

“Last week I spoke with ACCION USA’s Laura Kozien, who said that the organization is seeing more borrowers with FICO scores between 650 and 750, which is good credit. “We’ve really noticed a lot of people who formerly would have qualified at a bank,” Kozien told me. ACCION USA’s loan volume for June, July, and August was $1.45 million disbursed in 228 loans, compared to $1.2 million in 207 loans for the prior three months, so again, these are small amounts, but growing.

“Demand for microloans in the US has jumped in the past year, according to Sara Ignas of the Association for Enterprise Opportunity, a trade group for microlenders and microenterprises. She cites the example of a trucking company in New York, turned down for a vehicle loan to buy another truck, that got a $35,000 loan from ACCION New York.

“The numbers are small but the trend is interesting. Microlenders say they exist to serve those who aren’t served by banks. That has long meant people with poor credit, or not enough collateral, or people in low-income communities where banks don’t have much of a presence. But now that we’re seeing dramatic changes in the banking sector and a tightening of credit, microloans may become a mainstream financing option for very small businesses.” (highlight mine)

Lessons:

1. Markets will always find means to go around problems even if it translates to going back to the most elementary solutions, e.g. US entrepreneurs adopting developing country models.

2. In every crisis there is always opportunity!