Microfinance: Small Loans That Open Doors for Small Businesses
Microcredit is a banking system that offers small loans, especially to unemployed persons or those living in poverty who would not qualify for a standard bank loan. This kind of loan is often given to start a small business. Microloans range from as little as $100 to as much as $25,000. A few lenders provide additional services like micro-insurance as well as checking and savings accounts, and some go as far as providing financial and business education. Just like conventional lenders, microfinance institutions charge interest on loans and provide a repayment plan.
Most receivers are in developing countries and cannot obtain a traditional loan. Micro-savings accounts also fall under microfinance; they let entrepreneurs have a savings account without any specific minimum balance. Micro-insurance provides customers with insurance at a relatively low rate and with lesser premiums.
The advantages of microfinance:
Easier access. Traditional banks rarely extend loans to those with minimal or no assets, and they rarely indulge in small loans. With microfinance, small loans are easily accessible.
Autonomy. An entrepreneur may have a perfect business plan but not the funds to start. Microfinance provides enough funds for the venture to take off and generate income, and the loan can be paid over time from the profits.
Risk control. It gives a small business stable capital and some financial security against unforeseen monetary issues.
Women's empowerment. Women are significant beneficiaries. Over the years women did not have the opportunity to take part in economic activities, and microfinance institutions now give them the capital they need to start business projects.
The disadvantages:
Small size. Microloans are made to give a short ignition in the right direction. They are not the ones to pull you out of costly situations like regular banks can.
Multiple and higher payments. Lenders usually try to get the money back quickly, so you will have a shorter time frame to pay back and higher payments per schedule.
Limits on use. Some microloans have rules about what the funds may do. They do not allow customers to use the capital to pay off other loans or purchase real estate.