The human world is full of small things. Small efforts, small business and also small finance option, which we also call microfinance. It is considered as the base of money fuel and a saviour for the small businesses. From a start-up to the established small businesses, microfinance is a friend to the little commercial entities. A guide to its basic technicalities can offer an insight into the concept of this type of finance.
What is micro finance?
Microfinance is a sector of financial services that support small businesses with a small number of funds. Companies with the weak financial condition can find immediate support through microfinance if they do not help mainstream lenders. Just like the meaning, the funding option is simple to obtain for the fund seekers. If you are an existing business owner and have explored the benefits of microfinance, it is smoother to understand how things work and why people prefer it.
Benefits of micro finance
As you can understand through the meaning, microfinance has many benefits, and you can experience smooth business actions because it is always there to help. People from all over the world can present consensus on the evident fact that this tiny finance option is a hero of the funding world.
- Easy to repay – Yes, it should be the first point to mention as the benefit of microfinance. As this finance option offers short-term funds, the amount is not too big. It means they are easy to repay because when the obligation is tiny in size, obviously, it is easier to pay it off. The borrowers are never afraid of borrowing because they know that they can borrow easily and quickly repay if they have stable financial conditions.
- No collateral, no guarantor – Again, a significant benefit that offers you more reasons to rely on microfinance. Isn’t it amazing to borrow money without any burden of additional obligation? The procedure is 100% online because the verification process too happens online. This saves time, and also, there is no need to chase anyone to be your guarantor. No need to put the asset at risk.
- No stringent mainstream rules – Microfinance is an alternative to mainstream lending for small businesses. It is usually difficult for the small owners to qualify on the parameters of the mainstream lenders. Also, there is less number of option. But the microfinance gives easier funding choice without lengthy and burdensome procedures.
- Customisation on every deal – This finance option focuses on small businesses; it has an obvious feature of customisation. According to the business financial conditions, the owner gets a reasonable interest rate and repayment plan. It helps the borrowers take while they play to borrow funds. Something that is easy to consider always gets a good response from the customers in the market.
- Creates the credit history of a start-up – To walk forward on the path of progress, the businesses need to have a credit history because they need loans many times. Microfinance helps start-ups create a credit history. In fact, it is even available for poor credit companies. It can be easier for an individual to get unsecured personal loans for bad credit people with no guarantor to improve in personal finance. But for start-up, no or poor credit history can be a big reason for rejection. Microfinance helps create a credit history, and its easy repayments help bad credit businesses improve credit score.
Disadvantages of micro finance
The basics of a concept are never biased. When you get to know about good things about a concept, you should also know about its disadvantages. They will explain better whether you should consider them or not. However, there are fewer, in fact, no reasons to deny microfinance, but maybe for information only, look at the other side of an aspect.
- Small amount – It is the strength as well as the weakness of microfinance. Yes, this funding choice is good for the businesses that want to borrow a smaller amount but not for those who want more than the small. The financial needs in a company are quite frequent. In such conditions, it can be a priority to borrow a larger amount. Unfortunately, microfinance is not able to satisfy this need of the fund seekers.
- Repayment plans can be harsh – The word harsh explains the strict repayment policies of some lenders who may not compromise if you do not pay on time. The very first late repayment can invite a late payment penalty. It is always a better thing to talk to the finance company about the repayment plans. Borrow funds from a company only when you are entirely confident about the consequences.
- Rate of interest can be higher – This usually is possible only if the applicant has a poor credit history. In that case, the instalments can be more significant than the capacity of the borrower, especially in the case of a start-up business or in the case of a poor credit borrower. However, with strong repaying capability, the fund seeker can get money at a lower rate with customisation.
As you can see, usually, these only two disadvantages of microfinance come forward. It is the reason that most of the borrowers have many reasons to get money through micro finances. It is not easy for small business owners to say ‘NO’ to this funding alternative because it helps build the base of the businesses. Next time you borrow money for a small purpose, do not forget that microfinance is a good option and it has its individualistic features.
The above aspects explain that microfinance is a strong candidate among the funding options for businesses. Advantages and disadvantages are parts of every finance choice, but that does not snatch the significance of an option. The FinTech options have made the process easier. The reach of the funds has extended to even remote areas.