Kiva Loans: Are They Right for Your Small Business?

Kiva is a 501(c)(3) nonprofit headquartered in San Francisco, with offices in Nairobi, Bangkok, and Portland, Oregon, and staff around the world. Their loans support borrowers in over 80 countries across the globe, with the stated mission to provide “loans that change lives”—specifically, the lives of “unbankable” individuals and business owners who’ve been largely excluded from traditional funding opportunities. As such, Kiva loans have supported predominantly female borrowers, hundreds of thousands of business owners in conflict zones and developing nations, and even refugees and IDPs, or internally displaced people.

However, you don’t necessarily need to suit one of the above categories to get a Kiva loan—the organization’s M.O., after all, is to create funding opportunities for all types of borrowers. Kiva loans are so democratized, in fact, that they’re actually crowdfunded by individual lenders from all around the globe. (That means you can become a Kiva lender, even if you don’t end up becoming a Kiva borrower—or even if you do!)

Kiva loans are a little unorthodox, true. But if your business has been turned away by more traditional forms of small business financing, or if you’re simply curious about going the crowdfunding route, securing a Kiva loan might be an excellent option. Here’s what you need to know.   

What Are Kiva Loans?

Kiva’s lending platform offers short-term loans up to $10,000, with repayment terms between three and 36 months. But the major selling point here is that Kiva loans carry 0% interest rates. (Seriously.)

What also differentiates Kiva loans from traditional short-term loans is that, similar to crowdfunding, individuals—rather than financial institutions—actually provide loan funds. Through Kiva, lenders can discover businesses from all across the globe and contribute as much as they want to the borrowers and causes they believe in. (Though the minimum contribution amount is $25.)

Unlike crowdfunding, however Kiva is a lending platform, not a donation site—so those individuals will receive their money back. Kiva works with borrowers to establish achievable repayment plans, based on the borrower’s own ability to repay.

Full disclosure: Kiva does not always connect individual lenders directly to borrowers. Most often, Kiva affords loans to borrowers abroad, especially to entrepreneurs in developing nations, rural, and remote communities—after all, Kiva was established to serve individuals who have traditionally been excluded from the lending market, or who’ve simply not had access to loan opportunities.  

If the borrower in question is in one of these rural or remote communities, Kiva actually connects lenders to microfinance institutions. These Field Partners (which can also be schools, NGOs, or other social enterprises) work with these borrowers on the ground. They’re charged with vetting borrowers in person, distributing funds, collecting loan repayments, and working with borrowers on a revised repayment schedule if they’re at risk of default.

According to Kiva, however, the majority of loans for U.S.-based borrowers are direct, which means they’re not administered through Field Partners. In the case of a direct loan, the borrower receive the loan via PayPal once lenders have crowdfunded the full loan amount. To repay direct loans, borrowers transmit payments via PayPal and then Kiva deposits the funds into lenders’ own Kiva accounts.

How the Kiva Lending Process Works

Kiva loans are a unique product, and so is the funding process. Here’s how it works, from application to repayment:

1. The borrower follows Kiva’s application process.
2. Kiva approves the borrower.
3. The borrower’s information is posted to Kiva’s public loan page.
4. Individuals crowdfund the loan.
5. Once the loan is fully funded, the borrower receives the money.
6. The borrower repays the money, according to their predetermined repayment schedule.
7. Lenders use their returned money however they want, including to fund a new Kiva loan.

We’ll get a little more granular into each of these steps.

Rates and Terms

Kiva loans carry 0% interest rates. That means lenders don’t make a profit off their loans. Kiva won’t, either. (Hence why it’s a nonprofit.)

There is one caveat, however: Although borrowers won’t pay interest on funds provided by lenders, they will pay interest to local Field Partners, if Field Partners are involved in the loan. These fees cover the operational expenses necessary for Field Partners to administer and collect loan payments in rural communities. Sometimes, these organizations also provide services to those communities, like financial education courses, which require additional expenses.

Remember, though, that the borrower is only responsible for paying those fees if their loan is administered through a Field Partner. If the loan is direct, then the borrower won’t pay any interest or fees. And if your business is based in the U.S., it’s unlikely that you’ll be working with a Field Partner.

You can request a loan of up to $10,000 with repayment terms between three and 36 months, but the Kiva team will ultimately determine those terms based off your application. Repayments are due monthly, via PayPal.

How to Qualify for a Kiva Loan

One of Kiva’s major differentiators from traditional (or even most alternative) business lenders is their unorthodox qualification standards.

To be considered for a Kiva loan, you don’t need the minimum personal credit score, time in business, and profitability that most other lenders need to evaluate before extending you a loan. You won’t need to provide collateral, either.

Instead, you need to meet the following standards to get your foot in the door for a direct loan:

• You and your business are U.S.-based.
• You’re over 18 years old.
• You’ll use your loan for your business.
• Your business isn’t in a prohibited industry, like illegal activities or financial services.
• You’re not currently in foreclosure, bankruptcy, or under any liens.

Lastly, Kiva stipulates that “You must be willing to demonstrate your social capital by having a small number of your friends and family make a loan to you.” This requirement makes up a large part of Kiva’s underwriting process, too. (More on that next.)

Applying for a Kiva Loan

To apply for a Kiva loan, you first need to answer a few questions about Kiva to demonstrate that you understand the platform’s purpose and how their loans work.

Then, you’ll complete an online application. Expect to provide the following information:

• An explanation of who you are
• What your business does
• How you plan to use your loan
• Basic information about your personal and business financials (though you won’t need to upload financial statements)
• Your requested loan amount

After review, Kiva will determine whether you qualify for a loan, and in what amount. If you’re approved, a representative will contact you with more information. And if you’re concerned about your approval odds, consult Kiva’s list of application best practices—sticking to them means presenting the best possible case for your business’s cause.

Social Underwriting and the Private Fundraising Process    

Kiva’s due diligence process has led to a 96% loan repayment rate on their loans, and that may be credited to Kiva’s unique “social underwriting” system.

In this process, Kiva asks that borrowers secure loans from between five and 35 people within their own networks, depending on the size of the requested loan, over the course of 15 days. If you can fulfill your goal within that 15-day period, then you can move onto the public fundraising stage.  

For Kiva, this private funding phase is indicative of two key things: First, it’s arguably more demonstrable of your fiscal responsibility than your credit score is. This kind of social underwriting, Kiva claims, evaluates an individual’s creditworthiness based on the “strength of their character,” rather than a (relatively unforgiving) three-digit number. This aligns with Kiva’s objective to humanize the borrowing experience.  

Second, garnering “social capital” proves that a business idea is legitimate and has the potential to grow. As you may know from your own attempts to tap your network for funding, even your closest family and friends won’t invest in your venture if they don’t think it’s viable. But if they believe in the strength of your business—and they trust you with their money—then they’ll be more than happy to support you. Kiva adopts the same line of thinking when considering whether to include you in their loan program.

Public Fundraising on Kiva

Once Kiva has approved your application and you’ve fulfilled your 15-day private fundraising goal, then Kiva will post your business information to their public crowdfunding page. There, Kiva’s 1 million+ potential lenders can discover you.

You’ll then have 30 days to complete your fundraising goal. Once you’ve raised 100% of your funds, you’ll receive the loan amount to your PayPal account, and begin repayment one month after the loan is disbursed.

At this point, it may seem like you’re ceding control over the fate of your business to millions of strangers. But in reality, you can follow a set of best practices to ensure that you’re presenting your business in the best possible light, and attract more lenders to your cause.

To increase your visibility and get potential lenders on board with your business, Kiva suggests that you:

• Share your Kiva campaign across all your social media channels, and regularly post updates.
• Make personalized emails, calls, texts, and in-person events to fundraise within your network. Gradually expand your network using these methods
• Use the “Conversations” tab on your loan page, which allows you to interact with your lenders directly.
• Make sure the information on your loan page is comprehensive and features a good-quality photo of yourself.

Keep in mind that Kiva is an all-or-nothing model: If you can’t raise your target goal within that 30-day period, then you won’t receive any portion of your loan.  

Is a Kiva Loan Right for Your Small Business?

Kiva was created to provide funding opportunities to people and communities who have been historically excluded from the lending marketplace. In keeping with that vision, Kiva accepts a wide range of businesses onto their platform, whether they’re 70-person tech startups or seventh-generation farm owners. So, as long as your business suits Kiva’s few requirements, and you’re capable of fulfilling your 15-day private funding goal, your odds of approval are pretty good.

That doesn’t mean that Kiva loans are right for every business, though.

First, remember that Kiva can only provide loans up to $10,000. If you need funding for a large project, you may want to set your sights on a longer-term loan. Take a look at SBA Microloans, which can offer loans up to $50,000 to underserved borrowers like veterans, minorities, and female business owners.

Also keep in mind that running a successful Kiva campaign requires a good amount of outreach and self-promotion—receiving your loan at all hinges on your ability to get the public to believe in your cause. And if you don’t end up fulfilling your funding goal, you won’t receive any amount of your loan. You need to be willing to put in that effort.

If you don’t want to bank your business loan on your networking skills, then you might do better to apply for a short-term loan through an online lender. You will need to suit an online lender’s eligibility requirements, but receiving your loan funds doesn’t depend upon creating and executing an outreach plan. Typically, too, online lenders’ eligibility standards are much less stringent than what you’d encounter at banks.

Ultimately, Kiva is an excellent funding resource for businesses that have been turned away by other financial institutions or that simply want to connect with a global community of supportive lenders. It’s a renewable resource, too—if you’ve successfully raised and repaid funds, you can always start up another campaign on the platform. That said, some business owners may feel more comfortable securing a more familiar loan product.

Your best course of action is to evaluate how much money you’d like to loan, what you’re capable of repaying, how much effort you’re willing to contribute toward fundraising, and what types of loans you might be eligible for. Then consider all your available loan options—and these days, there are many.

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from Fundera Ledger https://www.fundera.com/blog/kiva-loans/