Microfinance offers a solution for small businesses — in need of funding.
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What is microfinance?
Microfinance is a way of providing small business owners and entrepreneurs, with the capital they need — to develop their businesses. Microfinance plays a key role for business owners — who do not have access to conventional banking funds. This lack of finance or “financial inclusion” makes it harder to access traditional loans, insurance and the investments required — for business growth.
Microfinance institutions may be non-profit (NGOs) — but the majority are commonly organized as for-profit entities i.e. non-banking financial institutions, commercial microfinance banks, or microfinance departments of large commercial banks.
Microfinance is also known as microcredit and can be seen as a source of alternative finance.
Microfinance — considerations
Historically, micro-finance referred to micro-credit or microloans — but has expanded to include micro-savings, micro-insurance and payment systems. Microsaving accounts, enable people to save money with no minimum balance — while microinsurance, insures people at lower rates and with less premiums. Payment systems, using mobile phones, also gives individuals easy ways to make payments and receive money (without using cash).
A microloan is credit, of low amounts, given to people who typically have little to no income. These loans allow them to start businesses and work towards financial independence. These micro-loans often require no collateral — and can range from as small as 50,000 Naira, to upwards of 5 million Naira (and above).
Microloans are usually disbursed by microfinance companies. These companies have put in place services, financial products and non-financial products — that help relatively poorer people, get access to banking services. Before advancing credit, microfinance institutions regularly educate entrepreneurs — in financial and business best practice. These courses include basic book-keeping, cash flow management, marketing skills and more.
Microfinance is present across emerging markets and in developing countries — in Asia, Africa and Latin America. In these countries — many people would not be eligible for bank accounts, lines of credit, or loans from traditional banks. Without microfinance, many would exclusively rely on loans with high-interest rates (loan sharks) and money from family/friends. Microfinance gives a way for them to become entrepreneurs — investing in themselves in the process.
Credit agents working for microfinance banks are essential — as they are the direct link a bank has with the end customer. Agents act as the men on the ground, traveling to meet with clients — wherever they are. Agents are involved in releasing money, collecting cash, providing new services and helping borrowers manage their finances.
Although men can get access to micro-finance, women living in rural areas — are the major beneficiaries.
How do microfinance loans Work?
Those looking for microfinance loans, to start a business, would need to approach an appropriate micro-lender. You would submit an application to the lender — giving details of your business (or idea) and its finances. Using this information — the microfinance bank will assess the viability of your business, you financial stability and the risk of lending you the funds.
As part of the application process — you may have to undertake a basic money-management class. Topics covered may include interest rates, cash flow, how to budget, how loans work and how to manage debt.
Loan officers often submit applications on behalf of applicants, and are also responsible for training customers on money management — as well as generally following up with them.
Should your loan be approved — monies will be advanced to you. Subsequently, you’ll begin paying back the loan — over the agreed loan-term.
Like conventional lenders, microfinance banks also charge interest and have specific repayment plans. As these microloans often do not require collateral — you may be asked for a personal guarantor.
Successfully repaying the loan, helps you develop a good credit history — enabling you to obtain larger loans in the future.
Benefits of microfinance loans
- Greater access to credit — less lending criteria to meet
- Loans are normally unsecured — no collateral needed
- Loans disbursed relatively quickly
- Interest rates may be lower
- You get trained on money-management
- Repayment plans can be more flexible — than conventional loans
Limitations of microfinance loans
- Smaller loan amounts given
- Loans are mostly short-term
- Loans primarily geared to start businesses — rather than business expansion
- Microcredit can be location targeted and reserved only for poor people, women etc.
- May require a personal guarantee
- Group lending is common — loans may only be approved in groups
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