Additional Paid In Capital On The Cash Flow Statement Can a Goat Herder Teach Banks How to Loan to Small Business

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Can a Goat Herder Teach Banks How to Loan to Small Business

Small businesses and entrepreneurs need to get loans from banks to grow and expand their business. Entrepreneurs and small businesses turn to banks for capital improvements, major purchases, business purchases, and generally to get loans to expand their businesses. Basically small businesses have financial needs that go beyond the immediate cash flow generated by their business.

Imagine driving into the bank in your new Lexus, dressed accordingly, meeting the bank loan officer and discussing your 5 year old business, your college degree, OK credit score, $500k net worth and your business $50k a year cash flow. and asking to borrow $10,000. Do you think you can get that loan?

Now- pretend for a moment that you are a poor goatherd and you are going around town to get a loan, you don’t have money to open a savings account, you don’t have any common collateral to secure the loan. You don’t have a credit record because you’ve never been formally employed and you’ve never taken out a loan before. Also note that you may not be able to complete the required documents as you are illiterate. You earn about $1/day and need a loan of $250 to buy more goats to expand your business. Do you think you can get a loan? – Micro-financing allows goat farmers to get loans before Lexus graduates from college.

Many of us entrepreneurs and small businessmen/women donate time and money to various causes or needs. I have been involved with Kiva since 2007. Kiva provides microfinance to third world entrepreneurs to help them grow their businesses. Kiva was founded by 2 former 20 something year olds who were former employees of TIVO and PAYPAL. Microfinance refers to the provision of credit, savings and other basic financial services to the poor. Microfinance financial services generally involve small amounts – small loans, small savings, etc. – The term “microfinance” helps to distinguish these services from those provided by formal banks. Why are they small? A person who doesn’t have a lot of money isn’t likely to want to take out a $5,000 loan or be able to open a savings account with an opening balance of $1,000. So – “micro.”

These are small loans, many lenders will “pool” their loans with a lump sum to provide to entrepreneurs. Again most of the entrepreneurs I have lent to in the last 4 years earn less than $1/day. When an entrepreneur pays off a loan, I give that money back to someone else. So far I have given loans to 18 different entrepreneurs and the loan repayment has been 100%. Since 2005 Kiva as a group has loaned nearly $150,000,000 to nearly 400,000 entrepreneurs with a repayment rate of 98.27%. Why can this organization be so successful in bailing out loans from those with so little, and why the problems of banks in our “developed nations” lending to those with abundant resources are so significant that these banks require a “bailout” from their governments and ultimately the taxpayers. Are conventional banks doing something wrong? Are they consistently lending to the wrong people? How much blame on the loan seeker?

How many good entrepreneurs and small entrepreneurs are unable to get loans today is because of the mistakes made by traditional banks in the past. I find that banks tend to be more responsive to problems. Obviously if you are a lender and you want to have no loan defaults and you have no money – you can achieve your goal. As a business broker I see the need for loans to allow buyers to finance the acquisition of a business purchase. I also look at the income statements and balance sheets of reasonable small businesses that are using credit cards to finance their businesses. It’s hard for me to see how our economy benefits small business owners by taking “whatever it takes” financing steps when traditional discretionary lending to small businesses may be our fastest route to financial recovery. Banks reduce/tighten their loans, the need for small business financing continues, credit card financing, higher interest rates are being paid in non-traditional ways and when those higher costs lead to layoffs. Small businesses can divert money from high interest payments to investments that improve their business and create jobs.

Why can’t a goat farmer get a loan and a print shop owner can’t? Or maybe if I were a banker I might ask why a goatherd pays off his loan and a Lexus driving college graduate defaults? I understand that there is a lot of comparison between traditional banks and microfinance- but maybe traditional banks could learn something from microfinance groups like Kiva.

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