Kiva and the New Kiva Zip Helping Entrepreneurs from Little Rock to Kenya

The word entrepreneur conjures up a very specific image in our minds: a go-getter type with an excellent idea, a great deal of passion, and access to enormous funds to get their dream off the ground.

Unfortunately, for many would-be entrepreneurs in America and the developing world, it’s the access to money that is the stumbling block between a great idea and a sustainable business. What’s most frustrating for these small business owners is the fact that they often only need a small amount of capital—the small and medium bucks that traditional banks are completely uninterested in lending.

That’s where Kiva (and now Kiva Zip) come in. Kiva is possibly the most well-known of all microfinance sites, and it has been helping small business owners since 2005. Kiva, which is Swahili for unity, offers lenders in America the opportunity to help out entrepreneurs all over the world, starting with lending increments as small as $25. Kiva Zip is a new project from Kiva that allows you to make direct loans to entrepreneurs in Kenya and the U.S.

How Traditional Kiva Works

Lenders can search through various entrepreneurs on the website in order to find businesses to lend to. The loaned money is then sent directly to a local micro-finance institution, which administers the loan to the entrepreneur. As the loan is repaid, the money becomes available in the lender’s account for either withdrawal or re-lending. All entrepreneurs are vetted for their credit-worthiness and ability to repay the loan prior to allowing them to borrow, and Kiva can boast an over 99% repayment rate.

Kiva lenders do not earn interest on their loans, although the entrepreneurs do pay interest to the micro-finance institution while repaying the loan. That interest can apparently be as high as 30%, which may sound egregiously high, but it’s important to remember that in many of these countries, interest rates on loans can be as high as 80% or more. The interest is used to keep the local lending institutions in business, which means that they can continue to lend and help local entrepreneurs.

You Can Still Make Money on Your Loan

While you do not earn any interest through your Kiva loan, savvy lenders can still find ways to make a modest return on their money. For instance, if you choose to use a cash back credit card in order to pay for your loan (and pay off your balance in full), you have in effect earned interest on the loan, even though it will take a little time to receive your full payment back from Kiva.

Kiva in the U.S. and Kiva Zip

For years, micro-lenders and entrepreneurs have wanted to recreate the Kiva model for American small businesses, but SEC requirements and regulations made that impossible. Until the passage of 2012’s JOBS act, U.S. companies could not have more than 500 shareholder before it was required to become a publicly recorded company. Considering the fact that micro-lending can easily result in that many “shareholders,” Kiva was not able to use its crowdfunding power at home. But the new legislation increased the number of shareholders for the SEC requirement to 2,000, making it possible for Kiva to help out small and struggling businesses here in the U.S.

In addition, the fact that neither Kiva nor its lenders are making a profit helps to keep American micro-lending legal. As Kiva co-founder Premal Shah explained to Gregory Ferenstein of TechCrunch,

“Kiva is a nonprofit and makes no money from the loans we facilitate, instead we depend upon optional donations. Kiva lenders make no money from the money they lend, they only expect the money they put in as a loan to be paid back. Because of this model, Kiva’s crowdfunding platform falls outside of SEC rules.”

As any American who has tried to get a loan since the economic downturn can attest, we are in a difficult credit position and it often seems as though the only people eligible for a loan are the ones who don’t really need one. With Kiva now lending in America, micro-lenders can know that they are helping individual entrepreneurs–and our economy as a whole–to get back on track.

Kiva is currently providing loans to U.S. entrepreneurs through it’s main website (under the traditional “field partners” model) and through it’s new direct person-to-person project called, Kiva Zip. Here’s a video explaining a successful Kiva Zip loan:

Person-to-Person Lending and Transparency

A search through Kiva’s list of entrepreneurs will give you many lending options, from farmers, herders, seamstresses, and fishermen in remote locations to educators and business owners in America.

It is important to note, however, that most of the entrepreneurs that you can choose to help on the main Kiva website have already had their loans pre-disbursed prior to getting their profiles listed on the site. The practical issues of micro-finance make it nearly impossible to disburse funds after a particular entrepreneur’s loan is funded. Instead, the local micro-finance institutions will provide entrepreneurs with the funds as they apply for loans, and the lender’s money will be used to backfill the loan so that there will be money available for new borrowers.

Kiva did come under fire several years ago for not making this process as clear as possible. Apparently, when the site began, their original model did ensure that lenders were giving directly to specific entrepreneurs. However, as Kiva grew, it became much more practical and beneficial to the entrepreneurs to pre-disburse the funds prior to posting the stories of particular entrepreneurs—but the website did not necessarily make that clear to the average lender. (That information was available, it simply required some searching on the site in order to be found).

Since that time, Kiva has attempted to make their processes as clear as possible, while still taking advantage of the benefit of the feel-good nature of person-to-person lending. While it may be disappointing to know that your money will not go directly to the goat-herder in Tajikistan or the bakery owner in Eugene, Oregon whose stories you find so compelling, lenders should remember that their money is being disbursed to those who need it, and without those moving stories, no one served by Kiva would be able to better themselves and their finances.

With Kiva Zip this isn’t an issue. Loans are made directly to the entrepreneur and no “field partner” is needed to pre-disburse the loan.

The Bottom Line

Kiva itself admits that micro-finance is no silver bullet for solving problems of poverty in many areas of the world–but it is still a wonderful use of money and can empower populations that are underserved by other financial services.

All in all, this is both a low-risk and a feel-good method of lending your money.

What do you think of Kiva, and their entrance into U.S. micro-lending? Have you ever participated in a Kiva loan? What about Kiva Zip? Are you using it yet?