What is a small loan? Look closer.
What is a small loan? Look closer.
Among the numerous Financing solutions Can be used by small business owners, Microloans Is one of the easier to obtain. Also known as microfinance, microfinance has become more and more popular in the past five years-and for good reason.
What is a small loan?
Microfinance is the practice of providing small loans (ranging from $25 to several hundred dollars) to business owners in need.
Small loans belong to Microfinance, This refers to any financial assistance provided to those who will not benefit from traditional financial institutions. Microloans It started to help business owners and entrepreneurs who 1) cannot get funding where they live or 2) cannot get funding from the bank due to their low income Credit score.
Thanks to the Internet and peer-to-peer (P2P) lending economy—individuals lend to each other—microfinance has become a global phenomenon. In developing countries and poverty-stricken areas, aspiring entrepreneurs have almost no government assistance to start businesses, and the role of small loans is particularly obvious.
How does a small loan work?
Micro loans work in the same way as most other term loans: borrowers receive a certain amount of cash in advance, and they must repay (including interest) within a certain period of time. Unfortunately, the interest rates on small loans are often very high. The global average interest rate hovers around 35%. That’s because lending to entrepreneurs with poor credit is more risky; in addition, borrowers usually don’t provide collateral.
Unlike bank loans, small loans can set unique rules for borrowers. For example, many microfinance institutions require borrowers to attend educational seminars or business courses before they can obtain funds.
Since most traditional financial institutions do not see the return of microloans, most microloans occur on P2P platforms. However, there are also a few specialized microfinance institutions (MFIs), such as 51Give in Beijing and Grameen Bank and BRAC in Bangladesh.
Some countries have also developed their own micro-loan plans.In the United States, the Small Business Administration (SBA) has a small loan program designed to help women, low-income, veterans, and Minority entrepreneurs Obtain working capital, supplies, or equipment.This Average SBA Small Loan Approximately $14,000, with an interest rate of 6.5%.
What are the benefits of a small loan?
Micro-loans can help entrepreneurs in marginalized communities or poor areas to conduct business, so that individuals and families in trouble can have a better income. In the long run, small loans can help create job opportunities, reduce poverty, and continue education.
As a small lender, there are small financial incentives in the form of interest, but the borrower may also default on the loan. For this reason, most lenders diversify their investments to minimize risk. For example, a microfinance institution might lend $100 to 10 different borrowers instead of providing $1,000 to a single borrower.
It should be noted that most microfinance institutions will not get involved in microfinance to obtain a potential return on investment.On the contrary, the main benefit of microfinance is to help valuable business owners Start or grow their company.
Information for Borrowers: Risks and Benefits
If your business requires a small amount of capital and it is difficult to get help Traditional financial institutions, A small loan may be right for you. Its main attraction is accessibility and ease of use. If you have a promising business plan and a fascinating story, it may be easier to obtain a small loan through an MFI or P2P website than to switch to a bank.
However, accepting small loans is risky. Funding is not always fast. Depending on your location or the lender’s requirements, you may have to wait weeks or months to get the money. In addition, if your business does not take off, you may be forced to pay high interest rates and thus get into a debt vortex.
Before making your choice, please consider the following factors:
- Your location and access to funds
- Your credit score
- how much money do you need
- Your business Profit potential
How to become a micro lender
There are several ways to get started.If you want to earn interest and/or participate in the business development of the borrower, please consider P2P lending Site like Prosperity or Loan club. You can also search for lenders using SBA List of local microfinance organizations in each state.
On the other hand, if you don’t care about your interests or don’t want to participate in the growth of your business, you can register Kiva, A microfinance institution that takes a more non-interfering way to donate.You may also want to view Crowdfunding, A funding solution that helps companies raise funds through charitable donations. You will not get your money back, but if you promise a certain amount of cash to the entrepreneur, you may be eligible for rewards or benefits.