A recent study of community development financial institution small-dollar loans to microbusinesses found that most borrowers improved their business outcomes, although some entrepreneurs struggled with managing their debt.
The study by the Urban Institute examined more than 13,000 businesses that took out a microloan from a CDFI from 2014 to 2018. Most borrowers had only a single full-time employee, and the median loan amount was $11,500. The researchers found that most borrowers were better off five years after taking out the loan.
“The median borrower credit score, mortgage balance and new business trade balance all increased, while credit card utilization (the ratio of credit card balance to maximum credit limit) decreased,” the researchers said.
However, they also found that the business owner delinquency rate and median credit card balance rose, “suggesting that the new debt presented issues for some businesses.”
“In general, this analysis demonstrates that not all microbusinesses manage taking on additional capital the same way, and as a result, not all borrowers need the same kind of support,” the researchers said.
