Microfinance and the Internet are combining to put small loans in the hands of entrepreneurs in developing countries.

The money is typically used to start small businesses; the loans are small and tend to be repaid within three to six months. As the borrower becomes more established, larger loans may become available. Borrowers sometimes form organizations to guarantee each other’s loan payments.

Think of microfinance websites like www.kivaB4B.org as the electronic version of the Grameen Foundation, a global non-profit microfinance organization founded by Muhammad Yunus, winner of the 2006 Nobel Peace Prize. The Grameen Foundation says it has a global network of 52 microfinance partners and has reached about 31 million people in 23 countries.

However, Thomas Dichter, author of Despite Good Intentions: Why Development Assistance to the Third World Has Failed, urges caution when sizing up the effect of microfinance.

“A major aim of the microfinance movement is to provide funds for investment in micro-businesses, thus lifting people out of poverty and promoting economic growth,” Dichter says in a report for the Cato Institute, a libertarian think tank in Washington.

Dichter goes on to say:

“Recent experience and the economic history of rich countries, however, suggest that those expectations are unrealistic. Most people, poor or otherwise, are not entrepreneurs, so there is little reason to think that mass credit would, in general, lead to viable business start-ups. Today, as in the past, business start-ups in the advanced countries depend predominantly on savings and informal sources of credit; past forms of microcredit never played a role in small business development, and much microcredit is actually used for consumption rather than investment.”

He notes that when Walt Disney and his brother, Roy, arrived in Hollywood in 1923, they borrowed $25 from Roy’s girlfriend and $500 from their uncle to launch the startup that became the Walt Disney Company (DIS).

“Self-financing (savings) or borrowing from a close social network has generally been used for business start-ups, at least from the early days of the Industrial Revolution,” Dichter says.

Saving to start a business is self-selective: Only those with a desire to launch a company -- and the skill to do it -- scrimp, save and take the risk. In short, the field is limited to a few talented and gutsy entrepreneurs.

Web sites such as kivaB4B.org seek to replicate the success of venture capitalists by linking individuals with as little as $25 upfront money to those planning to start a business. If the business succeeds, the entrepreneur has money to buy food for his family, see a doctor, educate the children, save a little and expand.

Kiva allows lenders to review profiles of entrepreneurs seeking financing. When a decision is made, the lender uses PayPal or a credit card to transfer the money to Kiva. Small loans are aggregated, if necessary, and the funds are then passed on to those launching a small business via a worldwide network of partners. The aspiring business owner repays the loan - usually within a few months.

Updates are e-mailed to lenders who request them. Lenders get their money back when the loan is repaid, and can re-lend to others, withdraw their money or donate it to Kiva to help cover operational expenses.

Advanta (ADVNA) matches grants dollar-for-dollar up to $200 for those using an Advanta business credit card through the KivaB4B program.

There are now an estimated 3,000 microfinance agencies reaching about 100 million people in developing nations. Worldwide, the estimated cash turnover of these institutions is $2.5 billion. While much of the microfinance work is handled by non-profit agencies, major investment banks have entered the field, including Citigroup (C), Deutsche Bank (DB) and Morgan Stanley (MS).

Charity continues to flourish in parallel to microfinance. Americans donated about $300 billion to traditional charities in 2006. The Center on Philanthropy at Indiana University says that represents about 2.2% of the nation’s gross domestic product and exceeds the 40-year average of 1.8%.

The Internet is becoming an important fundraising tool.

There are websites for traditional charitable giving, including DonorsChoose.org, which helps get books and supplies into classrooms throughout the nation. Other sites include Firstgiving.com, Change.org and DoSomething.org.

DoSomething.org is targeted at young people and seeks to get them involved in social action. It offers the predictable mix of stories on global warming, illegal immigration and the good things celebrities are doing to fight melanoma.

FirstGiving.com allows users to set up pages and raise money for a favorite charity. The website says it subtracts a “small transaction fee” before sending the donation to a nonprofit - and confirms that the organization receiving the donation is a certified nonprofit as defined by the Internal Revenue Service.

SixDegrees.org is a social networking site that allows users to support their favorite charities or seek donations for established charities.

The Internet makes it easier for those interested in helping others to select and target their money. With a few clicks, you can make a wise choice: microfinance or charity.