Micro-Banking Has a Go in the U.S.

Highlights include Citigroup Inc. (C - Analyst Report), Bank of America Corp. (BAC - Analyst Report), JPMorgan Chase & Co. (JPM - Analyst Report), Wells Fargo & Co. (WFC - Analyst Report) and U.S. Bancorp (USB - Analyst Report).

In 2006, Bangladeshi economist Muhammad Yunus pioneered "micro-credit" with his Grameen Bank concept in India. He won the Nobel Peace Prize for it. This "new" category of banking focused on small loans to poor people who have no collateral and who do not qualify for conventional bank loans.

Considering the state of the economy with US banks running around like "zombies" refusing to lend, small business owners have been unable to access their traditional credit providers. Forget credit cards -- a growing number of small businesses have found another portal available.

With "peer-to-peer lending," a borrower fills out an application (5-20 minutes to fill out) then the lending club (ex. Lendingclub.com and the national nonprofit microlending organization Accion USA) instantly accesses credit information.

If the loan is approved, it gets listed on the web site for two weeks, permitting any member the ability to lend the borrower money (1 or more individuals can lend). The interest rates depend on the credit risk of the borrower.

These small business borrowers are typically asking for capital for projects ranging from buying new equipment to leveling out cash flow, with loan requests of $500-$50,000). According to Accion USA, the organization issued more than 1,700 loans totaling more than $11 million (an average loan of less than $6,500).

These types of non-traditional lending entities are willing to support startups and home-based businesses that do not fit the lending perimeters found at tradtional financial institutions or the Small Business Administration (SBA).

However, micro-loan applicants must meet a few important criteria besides having a great passion for their business and a willingness to work hard. They must also have demonstrated a proficiency or an extreme willingness to work to keep their credit in good standing (i.e. a limited amount of past due debt).

In addition, there must be a nearly complete business plan than can be finished. Moreover, the applicants have to be prepared to have some "skin in the game" -- putting their own personal credit on the line as personal guarantors of the loan if the business were to fail (a totally understandable and reasonable request).

This type of competitor should serve as a wake-up call to financial institutions such as, but not limited to Citigroup (C - Analyst Report), Bank of America (BAC - Analyst Report), JPMorgan Chase (JPM - Analyst Report), Wells Fargo (WFC - Analyst Report) and US Bancorp (USB - Analyst Report) that continue to operate in a non-lending mode. For when the economy turns, they may find that a good portion of their potential lending customers have gone elsewhere for good.

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