Microcredit or microfinancing is not new. Even before the days of Mohammad Yunus and the Grameen Bank of Bangladesh, which drew the world’s attention by providing funds with no security to the mainly poor women in regional areas, microfinancing was supporting many struggling individuals and businesses around the world.

In the mid-1800s the theorist, Lysander Spooner, wrote about the benefits that small amounts of credit provided to entrepreneurs and farmers could lift them out of poverty. By 1901, a village bank movement in Germany had provided small loans to over 2 million rural farmers over the proceeding 37 years. The concept had major international impact when the Marshall plan post World War II, provided foreign aid to Western European economies to help them rebuild. These were just some of the many examples of providing funding support to those considered a bad risk and not of interest to traditional funding institutions.

In the 1970s the term microfinancing really took root. A number of funding pioneers introduced a wave of innovations into the sector and started experimenting with lending money to those who were ignored or underserved by both traditional lending institutions and their communities. It was at this time that programs began to demonstrate that these sections of the community could be relied on to repay their loans and that the organisations providing funds could, in fact, become sustainable.
Professor Yunus and the Grameen Bank were awarded the Nobel Prize in 2006 because amongst other things they represented the view that “lasting peace can only be achieved if large populations can break out of poverty”. Women, in particular, were known to struggle because of social and economic isolation and repression in many places around the world. However, when provided with the opportunity, they were known to work hard at bringing about their independence and creating a legacy for their families. They rarely failed to repay their loans.

New opportunities

The coronavirus pandemic and the impact this has had on peoples working lives and financial security, but also the new opportunities that are springing up to cope with these changes has brought this type of funding front of mind again.
We have seen many examples of cafés, restaurants, and education providers pivoting their business models to take their bricks and mortar stores online, providing services in a flexible way that suits the changing needs of customers. Many have been surprised by their own success. Others have taken the plunge and started new enterprises. We have seen new food, product and service companies launch to provide those of us confined to our homes with new options to eat, entertain, exercise and stay in touch.

Some of these ventures have been in the works for a while before the pandemic hit, for others, it was about seeing an opportunity, and yet for others, it was a matter of necessity. These businesses are probably not going to be the next Google or magic unicorn our society seems to favour, but many will become good solid businesses employing people as they grow.

Many of the businesses that are being forced to pivot as well as the new businesses being set up have used savings or credit to fund their businesses. Some have used redraws on their mortgages. In general, banks are hesitant to provide loans to new, or in many cases, established business ventures right now. This makes accessing the money needed to set-up a business properly with the right structures, insurance and resources, especially challenging.

In 2012 Lighthouse Business Innovation Centre partnered with the ACT government to launch the ACT Microcredit program. Initially, the program aimed to support women on low incomes to start a business.

“We supported 40 businesses over the first three years - 10 businesses above our target and we could have supported more,” says Anna Pino, CEO of Lighthouse.

“ Many of these women had been in challenging domestic situations, had physical or mental disabilities or had lost their confidence due to other challenges, but they all knew that they wanted to change their situations and have more control and say in their futures.

“The businesses were in sectors as diverse as fashion, food, children’s education and allied health. We knew we were onto something when we received comments like ‘its not about the money, but the support”, and “I feel like I have value again”. Our approach has always been to focus on the person and the business will follow,” says Anna.

A program that has evolved over time

Over the first three years, the program was receiving an increasing number of requests from men who were in principal carer roles for children or other family members, people who were unable to find work due to a disability and young people who wanted to be in business but couldn’t find anyone to take them seriously. So in 2014 with the support of both the ACT Government and Westpac a number of pretty major changes were made to the program:

• Applicants were no longer referred to as low-income earners;
• The program could now support anyone who met the financial eligibility requirement and wanted to start a business but could not find support due to financial, cultural, medical, and demographic or gender issues.
• Two types of loans were now available under this program – up to $3,000 interest-free between $3,000 and $10,000 at a flat 3percent. There are still income eligibility requirements and ongoing mentoring still provided.
• Redraws on funds repaid were now possible to allow the recipient to manage cash flow and continue working with a manageable debt level.
• Flexibility was built into the program, allowing Lighthouse to work with recipients if they hit a bit of a cash crunch, ensuring that we continue to focus on the needs of the individual.

As at today we have around 30 loans on our books and we approached each of them to ask if they needed a grace period on their loans during Covid-19,” says Anna. 

“Only a small number asked if they could stop or decrease their payments. Most just wanted to continue payments and two actually asked us for additional funds because they had taken on some new work and needed additional resources”.

“Our current loans again cover a wide range of industries and recipients. Businesses are in IT, textiles, ride-sharing, art and creative, food, health and wellbeing and education. The profile of our recipients is also mixed – young, middle-aged, older men and women, some with disabilities, some are carers and some have just had a tough couple of years and are now ready to get on with it.

“We at Lighthouse have also learned a lot from our involvement in the microcredit space”, says Anna.

“Taking on this program was not without risks for us as a business, but we made sure we got the right advice and support from our own mentors in the early days. We also learned that success is defined in many ways. So we celebrate when a business we supported has its 5th birthday or when a recipient decides to close down their business and reengage with the workforce after many years because they now had the confidence to do that. It’s all about creating opportunities.”

Microcredit is not new and it will be around in many forms for many years to come. And maybe if you thought that you would never have the opportunity to get that business you have always dreamed about off the ground, these unusual and challenging times and this type of funding might just be the launching pad you need.