One of the major issues related to small business owners or entrepreneurs aspiring to grow a business are access to funds. Traditional banking services are based on very stringent eligibility standards, and most small business owners, especially those in rural areas, cannot meet those criteria. This is the space through which microfinance can greatly fill in the promotion of small business enterprises. Microfinance schemes provide loans to those who would otherwise not access financial institutions and, by the available loan, allow them to finance their venture and eventually enhance their standard of living.
In this article, we explore what microfinance schemes are, their features and benefits, important considerations towards small business growth, and how they contribute to the expansion of small businesses.
What are Microfinance Schemes?
Microfinance schemes are those financial services designed to offer small loans and other banking facilities to those whose access is barred due to the severe constraints of their limitation and ineligibility to access mainstream banking services.Such sme loan types can help Low-income sections, which may include women, farmers, artisans, or those living in rural areas, do not have the required collateral or credit history that traditional banks need.
Microfinance institutions in India, have been offering a wide range of financial products such as microloans, insurance, etc besides money transfer services. The main idea is to give people resources to expand small businesses, generate income, and finally break the cycle of poor fund flow. The amounts advanced under microfinance loans are usually between ₹5,000 and ₹1,00,000, though little paperwork and no collateral are usually required.
Features and Benefits of Microfinance Loans
There are many features and benefits of microfinance loans, which make them highly appropriate for small businesses. These include the following:
– Small Loan Amounts: As compared to a normal bank loan, the loans released under the microfinance scheme are quite small. They can range between thousands of rupees and a lakh or even more, depending upon the requirement of the individual applying for the loan as well as the policies of the lending institution.
– Easy Eligibility Criteria: They have relatively easier eligibility criteria than regular banks. It is not very difficult for people having no stable source of income, credit history, or collateral to become eligible for microfinance loans. It has therefore become an outstanding choice for rural area small businesses or those run by a person who could not be served otherwise by the formal banking sector.
– No Collateral Required: Most of the microfinance loans are unsecured which means that borrowers do not need to secure the loan with some collateral such as property or assets. This feature is very helpful for small businesses that do not have valuable assets.
Hence they also offer repayment options that are flexible and customized according to the financial situation of the borrower. For example, the seasonal income earners; most small business operators earn according to certain seasons, and a microfinance institution will allow them to repay during small amounts or a short period when the income is seasonally high.
– Group Lending Model: They work on a group lending model wherein a group of individuals borrow together and act as guarantors of one another. The lenders are protected against bad debt as the borrowers would fear losing their creditworthiness that the loan and its interests.
– Empowering Women and Marginalized Groups: It addresses the empowerment of women and marginalized sections. Since a woman is believed to be more inclined toward investing in her family and community, women are generally preferred for microfinance loans. In many cases, women venture into small-scale enterprises such as tailoring, small shops, or food businesses by which their earnings will be.
Advantages of Microfinance Loans for Small Businesses
– Entrepreneurial Activity: There are many players in the market who give business loan in India, Microfinance lends small unsecured loans to low-income borrowers. In this manner, microfinance encourages entrepreneurship by providing new ventures, which subsequently boosts economic growth.
– Helps in Business Expansion: Established small businesses may apply for micro-loans to improve their operations, invest in new equipment, hire more employees, or increase their inventory. Small flows of capital can eventually lead to more growth.
– Improves Livelihood: The income earned from a small business financed using microloans can reasonably be expected to raise the level of living enjoyed by the borrower. Entrepreneurs can use the money generated in profits and thus better educate their children, improve their homes, and have better healthcare.
– Encourages Financial Discipline: Borrowers are asked to repay the amounts borrowed in regular installments that exhibit the borrowing entity to be able to maintain greater discipline in personal finances. This helps small business owners to effectively manage their finances and to prepare them for bigger financial obligations in the future.
– Community Development: Microfinance helps the individual, but it also brings about development at the community level. When the small business is expanding, it gives employment opportunities to other people in the community, thereby enhancing the economic conditions as well.
Key Things Small Businesses Must Remember
Although microfinance comes with numerous benefits, small businesses must remember a few important things before choosing microfinance loans:
– Interest Rate: The interest rate is significantly higher on microfinance loans than that for regular bank loans. Since Microfinance loans are risking more on lending to a client who has no collateral and no credit history, they usually charge a higher interest rate. It is, therefore, important for small business owners to think and understand their ability to repay and go forward with the loan.
– Repayment Obligations: Although microfinance loans have flexible repayment options, repayment obligations are highly essential for determining one’s repayment schedule. Therefore, it is essential to ensure that the business will generate enough income to repay it with time.
– Loan Purpose: Small business owners should have a plan on how they would invest the money. It is essential for them to borrow what will benefit their businesses and only if their loan will boost their business.
– Business planning: A small business enterprise must draft a detailed business plan before availing the microfinance loan. This will help the facilitation of granting the loan and effective use of funds for business growth.
Conclusion
Microfinance is one of the most powerful tools for small business growth, particularly in regions inaccessible by conventional banking services. Easy accessibility to micro-loans facilitates entrepreneurs to begin, grow, and improve their livelihoods and contribute to economic development in their communities.
NBFCs are another good option for small entrepreneurs who have additional fund requirements. They offer easy and hassle-free small-loan access with minimal paperwork and flexible repayment choices that suit entrepreneurs who don’t strictly qualify for traditional banks. Thus, the benefits of NBFCs are that small businesses can make use of funds to grow and expand their scale of operations and expand their business; hence, it is the most reliable and convenient option for funding the business.
