There's a current controversy about just how effective microfinance is in developing nations.  I'm referring to organizations that provide tiny loans to poor people, usually women, in India, Latin America, and Africa, to jumpstart a tiny business. 

 But what's lost in this discussion is how useful microfinance has been in the good old USA during the current downturn. 

 In this country, microfinance organizations are often nonprofits, providing loans of up to $35,000 to small businesses. They're typically community development finance institutions (cdfis).  And, they usually have pretty different criterion for lending from your basic bank--a mix of such factors as a good credit score, industry experience and collateral. That collateral, however, often can mean a TV or a car. 

Additionally, there other cdfis that lend small businesses amounts of up to $200,000, although the average is $77,000 according to Donna Fabiani, executive vice president for knowledge sharing at Opportunity Finance Network , a Philadelphia-based network of financial groups.

According to Opportunity Finance, demand from companies that can't get bank financing has shot up.  In a recent survey, 81 percent of 16 microfinance organizations reported that applications increased in the fourth quarter of 2009 vs. the same quarter the year before.  The number of new loans grew 69 percent.  And of 32 small-business cdfis, 68 percent experienced an increase in applications and 56 percent a rise in loan originations. 

Small-business consultants who work directly with companies also report how important this source of funding has been during the downturn. Take Jim Olp, who is senior business consultant with the Denver Metro SBDC and spends his days counseling struggling small businesses. In an email, Olp said, "Microlenders certainly have stepped up in 2009 and were actively engaged in small business loans at a time when commercial banks were doing almost nothing." 

He points to one example, a client running a specialty food company. Because she had had a prior business failure, she couldn't get a commercial bank loan to finance machinery she needed to rev up production. A local microlender provided the money.

 Still, this isn't entirely a feel-good story. Fact is, Opportunity Finance also reports that  69 percent of microlenders reported a rise in the number of workouts from third to fourth quarter of 2009.

Of course, that may not be much worse than bigger lenders' recent experience.