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How do MFI loans work?
Nonprofit funding for individuals and businesses in underserved communities.
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Microfinance institutions (MFIs) are nonprofit financial organizations that specialize in helping communities that have no access to traditional financing. They offer small-dollar loans meant to fuel the economy of underserved areas. While they can get expensive, costs and eligibility requirements vary widely by lender.
What is an MFI loan?
An MFI loan is a small-dollar unsecured loan from a nonprofit lender that specializes in helping small businesses develop themselves. Usually, you can borrow up to $10,000 at APRs around 15% to 30%. Some lenders like Kiva offer partially crowdfunded loans that don’t charge any interest at all.
Most MFIs only offer business loans for entrepreneurs, though it might be possible to find personal loans as well. MFI loans are also sometimes referred to as microloans.
Can I qualify for an MFI loan?
Eligibility requirements vary by lender, though typically you must meet the following criteria:
- US citizen or permanent resident
- Age of majority in your state
- Social Security number or tax identification number
Most MFIs in the US require you to use the funds for business purposes, since personal loans are uncommon. Many lenders also focus on funding women, minorities, veterans and low-income borrowers, though anyone can apply. You generally don’t need to meet any credit or income requirements to qualify.
How do I apply for a mirofinance loan?
Getting a microfinance loan works a little differently than other types of financing. The application process can vary widely depending on the lender. Typically, it follows these basic steps:
- Fill out an application, either online or at the MFI in person.
- Provide supporting documents, if required.
- Sign your loan contract.
What other steps might I have to take?
Usually, it doesn’t stop at simply submitting the application. You might also have to take some or all of the following steps to get an MFI loan:
- Join a group. MFIs like Grameen offer loans to groups, rather than individuals. You might have to find a group of other eligible borrowers to join before you can apply for financing together.
- Become a member. You might have to apply to become a member of an MFI before you can borrow — similar to a credit union.
- Take a course. Some MFIs might also require you or your group to take a financial education course.
- Open an account. In some cases, you might have to open a savings account before you can receive your funds.
- Recruit lenders. MFIs like Kiva that offer crowdfunded loans require you to find individuals in their social circle to partially fund your loan before it provides the rest of the funding.
Since MFI loans often require additional steps, it can take over a week to get your funds.
How do repayments work?
Typically, you’ll make monthly repayments to your lender until your loan term is up. MFIs usually report repayments to the main credit bureaus, so making on-time repayments can help build your credit score.
Some MFIs like Grameen might also require you to continue to get financial education training while you pay off your first loan.
What other products do MFIs offer?
Some MFIs only offer loans, while others might also offer the following types of products:
- Savings accounts
- Insurance
- Financial education services
4 alternatives to an MFI loan
An MFI loan isn’t right for everyone. Instead, you might want to consider the following alternatives:
- CDFI loans. Community development financial institutions (CDFIs) are small, local banks and credit unions that offer financial services and loans to individuals and businesses in a community, sometimes with ever-lower rates than MFI loans.
- PALs. Some federal credit unions offer payday alternative loans (PALs). These small-dollar loans with interest rates capped at 28% aren’t common, but they might be easier to find than an MFI personal loan.
- SBA microloans. You can borrow up to $50,000 at a more competitive rate through this government-backed loan program, though you might have to meet more strict eligibility requirements.
- Online loans. If you need a personal or business loan fast, online lenders might be able to get you funds as fast as the next business day.
History of microfinancing
Dr. Muhammad Yunus founded the first microfinance institution — Grameen Bank — in 1983. The idea was to offer affordable working capital so that underfunded entrepreneurs — especially women — could get their businesses off the ground and sustain themselves.
Since then, Grameen has served as the blueprint for thousands of microfinance institutions across the world. Yunus went on to win the Nobel Peace Prize in 2006 for his work, in addition to a wide range of other awards.
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Bottom line
MFI loans could be useful if you don’t have access to other types of financing and are trying to get a business off the ground. They typically don’t have any hard credit or income requirements. And you might be able to take advantage of additional resources like financial education courses. But it’s slightly more expensive than your typical personal or business loan, and it might take longer to get your funds.
You can learn about your other options by visiting our guide to personal loans or our article on business loans.
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