So you want to be a venture capitalist?
August 31st, 2006
If you haven’t heard about it already, you will soon. Microfinance lending is an innovative way for people without access to traditional banking to borrow money to start or expand a community-based business. Loans can be as small as $50 or $100, and many times the borrowers are women or groups of women in small villages or rural communities.
There are quite a few institutions out there promoting this idea, but the folks at Kiva.org are bringing the arena of microfinance into the world of Web 2.0. Here’s how it works:
First, choose a business.
Kiva partners with local agencies to identify a daily updated list of individuals with financial needs. Countries range from Uganda to Ecuador, Kenya to Cambodia. Business range from new taxis to used clothing to grocery stores. Photos make it easy to put faces to requests. Who you fund is up to you!
Next, make a loan.
In increments of just $25, you can loan part or all of the funds requested for people to grow their businesses and improve their lives. Paypal secures the funding transaction.
Third, receive payments. As borrowers repay the loan, you will receive periodic updates on their progress. When the payments are complete, you can either withdraw or re-loan the original funds to another borrower.
The high falutin’ idea of microfinance simply requires small loans from small lenders (that’s you!). You don’t need an advanced degree from Wharton or more cash than the cost of a couple of movie tickets. With $25 and a willingness to reach out to help, you can make a difference.
So what’s the worst that can happen? Just because you’re lending like a VC doesn’t mean you’ll start to act like one. (Did I just say that out loud?)
September 1st, 2006 at 8:46 am
I like Kiva alot. Microfinance is a proven way to help the most needy make a job for themselves and often others, too. The ease of relating with specific people with specific needs is terrific. Kiva is doing a great good in reducing the transaction costs of making these loans.
I have concerns. Maybe someone knows the answers.
“Kiva’s loans are personal agreements between lender and borrower”. Oh-no…
I feel frustrated by my anticipated Federal (and State and FOREIGN) tax reporting. (I’ve found that as a US citizen, simply reporting Canadian income earned as an independent contractor to be a nightmare, requiring filing a Canadian and provincial tax returns, which requires a Canadian work permit, which cannot be obtained in arrears….)
I wonder if it will be similarly hard to “color inside the lines” on this one. If the amounts are small, then simply ignoring it and not reporting the loans to any of the taxing authorities is the easy, but perhaps illegal way to deal with it. As one starts to commit larger amounts, this may not work as well.
It’s frustrating considering doing good and envisioning a sea of governments’ red tape.
I imagine that the cost of actually complying with such paperwork for each loan might be larger that the entire loan itself.
I wonder about:
1) No interest is paid to lender. But the borrower is charged interest. “Kiva’s loans are personal agreements between lender and borrower”. Yet “Kiva’s loans do not provide a financial return on investment.”
If this really means interest is earned, then completely offset by the “cost of loan servicing”, then I imagine this to look more like tax reporting on a break-even business. A number of questions then follow, like interest earned during the year. Would Kiva calculate the interest for the year on each loan and send a statement?
Does my Federal Schedule B need to include a separate line for each person I lend to, as each loan is directly between me and this borrower?
2) Would I have to disclose under Part III, “Foreign Acccounts and Trusts” on Schedule B of the Federal Tax Form?
3) Foreign Taxing Authorities
If I lend $250 in Ghana, $100 to El Salvador and two $75 loans to people in Mexico. I am earning money in each of these countries. I imagine there are income tax reporting (even if not profitable) and perhaps loan registration fees. The propect of filling out African tax returns, even if in French, is daunting!
4) It would be nice to simply make a donation for funding, but which you can direct to be lent, repaid and relent to specific clients. Kiva accepts donations via Village Enterprise Fund. I wonder if they might also facilitate this. A donation has much simpler tax paperwork.
5)To scale the size of funding by a lender, what is really needed is someone who can navigate the tax laws to identify and explain simple and inexpensive ways to be compliant the the various taxing authorities.
6) In particular, one alternative I imagine many people would be willing to do is to forgo interest. They do want the principal amount back, but would give up the interest to save the paperwork headache.
September 1st, 2006 at 8:50 am
those are all very good questions (and all questions i should have expected from you steve!).
i will try to get someone from kiva to respond…
September 25th, 2006 at 10:37 pm
Thanks for the questions Steve! I’d love the chance to clarify the way Kiva operates for you.
Technically, the way that Kiva’s loans are structured today are
“recoverable grants”. Essentially, by making a loan on Kiva you are
granting money to the posted borrower, through a microfinance
institution, with the anticipation of recovering the principle that
the microfinance institution loans to the borrower. There is no legal
enforcement tied to this recoverability, meaning that repayment is not
enforced by any legal contract. If you are not repaid, you have no
recourse to file a suit against Kiva, the microfinance institution, or
the borrower.
Since there is no anticipation of profit, you don’t need to report the
recovered payment to they government. In addition, you cannot deduct taxes based on the grant since it is made with the anticipation of recovering it. However, you can count any loss as a “capital loss”
within the US. This is similar to if you lose money in the stock
market.
Kiva has recently received its 501c3 tax-exempt status, and donations to Kiva are tax-deductible. However, these are donations to Kiva, and not to a borrower in the developing world. Right now we do not facilitate donations to borrowers.
So, Kiva’s loans are much simpler than imagined in terms of tax implications. We have specifically designed our system so that it is easy to use, and many of the headaches you have anticipated are quite unnecessary.
I hope this was helpful.
Best Regards,
Fiona Ramsey
Customer Relations and Operations Manager
(415) 641-5482