Reinventing America New credit options that aren't death traps

If the 2008 proved anything to anyone, it proved to America that credit, the main lubricant in the engine, can’t be taken for granted. Everything, from a car loan to business credit, has the ability to be tight. The mortgage documents scam now sweeping the country’s courts has hardly helped. That’s not exactly convenient or helpful for a nation which has funded generations on borrowing.

The micro loan approach

The micro loan is an unusual creature in the world of finance. It’s designed specifically to meet workable budgets, and it’s geared to help people fund businesses. Unlike the rectangular ulcer with the PIN numbers, the loan is also targeted to a function, like buying business assets. Micro loans are designed to build capital, not destroy it or provide a series of death traps for borrowers.

A business will borrow a relatively small amount for a project designed to gain new income earning capacity, like a new asset or business capacity. The loan is paid back quickly, because it’s a quite small amount, and well within the capability of the business to repay.

If this seems uncharacteristically rational for US business lending, it was originally developed in the Third World to set up local businesses. It’s been a raging success. The micro loans are easily managed by borrowers, and they’ve also broken the chains of the murderous lenders in those regions.

Something like it is now in operation in the US. A merchant bank called Next Street has been providing loans which if not actually micro, are geared to middle size businesses and creating viable business operations. This bank, instead of removing bone marrow, also provides business support.

Extrapolating the micro loan concept

The basic micro loan, applied to businesses, has a lot of positives and few negatives:

-Micro loan capital is always low risk and at manageable levels.
-Borrowers aren’t threatened by capital commitments.
-Micro loans are used to create business assets.
-There’s no real risk to lenders, which defuses the natural circumstances of refusing loans.

A business can take out a series of micro loans to develop capital, on the same low risk basis. This is a sort of “staged financing”, but carried out at the borrower’s discretion.

The US finance market has been rightly criticized for placing major priority on giant corporations and effectively ignoring the much bigger domestic business market. The middle range businesses are Main Street’s businesses, not Wall Street’s. These are also demographically major employers. The credit squeeze, (which is variously seen as political and/or elitist depending on who’s talking), has had the effect of starving America’s middle range businesses of capital at the worst possible time.

Micro loans don’t have an downside. They’re a realistic approach to what remains a highly critical situation. Alternatives to the current lending deadlock must be found, and this model provides a realistic, low risk way of dealing with it. Micro loans are more like car loans than business loans, and they can provide a lot of liquidity in an economy that needs exactly that.

Thanks to FreeFoto for the picture.