The Benefits of a Micro Loan
Since the financial crisis many entrepreneurs have found it difficult to secure traditional bank loans. Some have poor business credit or don’t have the cash flow to reliably make loan payments.
These are the perfect candidates for micro loans. This article will cover what they are and how to get one.
How do they work?
When Mohammad Yunus won the Nobel Peace Prize in 2006 for founding the Grameen Bank and offering microloans, he promoted a vision that these small 예금계산기 could help lift poor people out of poverty by encouraging them to start businesses. It seemed to work – anecdotes abounded of women who had been held back by their families or communities breaking free from poverty traps with the help of microloans.
But the reality has been more mixed. Some studies have found that borrowers have not boosted their incomes with the aid of these loans, and others have been less positive, with researchers finding that in some cases, microloans seem to encourage gung-ho entrepreneurs who take on excessive risks that can lead to bankruptcy.
The microlending industry is complex, with nonprofits such as Accion USA and for-profit organizations such as Kiva and Opportunity Fund all providing this type of financing. Many of these companies also offer training and support services for borrowers, helping them to make their ventures more successful.
But some critics argue that the problem is not with the loans themselves, but rather with how they are used. They point to evidence that borrowers are using the funds for other purposes besides business, including paying school fees and buying medicine during slow periods. But Karlan argues that even if this is true, it doesn’t undermine the value of microloans as an important tool for extending financial options to poor people.
What are the benefits?
Many small business owners may not be able to qualify for traditional funding options due to a low credit score or lack of revenue, but 소액대출 are designed for these communities and can range from $500 to $50,000. They can be obtained from private lenders such as Pursuit, or through peer-to-peer microlenders like LendingClub and Prosper. Additionally, several nonprofits offer microloans to entrepreneurs in specific regions or communities.
When Yunus introduced the concept of microfinance, his intention was to empower people in developing countries with a wide variety of financial tools so that they could invest in their families and businesses and ultimately lift themselves out of poverty. However, researchers soon started to question whether the model was achieving this goal. A series of randomized evaluations found that for businesses with no prior experience, microcredit did not lead to higher profits or improved household income.
Then the research took an intriguing turn: when borrowers were given more flexible loan terms, such as longer repayment periods or more flexible payments, they did see increases in both income and business profitability. This led researchers to begin exploring a new hypothesis: that poor families, just like richer ones, need broad financial tools — and that the way to deliver these is with microloans. Moreover, if those tools are used responsibly to increase a family’s financial stability, they can also help to reduce risk and vulnerability.
What are the drawbacks?
Microloans are an essential tool for people without steady incomes or credit histories. They are part of microfinance, which aims to support people of a lower socioeconomic background through catered financial services that include savings accounts and loans. Without them, individuals may rely on risky payday advances or loans with exorbitant interest rates, which can put them in a cycle of debt.
Microcredit is a growing market, particularly in developing countries where many individuals do not have access to banking or other financial institutions. Many microloans are funded by private investors on p2p lending platforms like Prosper and Lending Club, where individual lenders contribute small amounts of money to help fund borrowers who otherwise would not receive financing.
In studies where borrowers were allowed to select their own loan purposes, high-potential entrepreneurs reported using microcredit to grow their businesses, increase employment opportunities and wages, and boost production levels. However, a significant proportion of borrowers (up to 15 percent in Bosnia and Herzegovina and India) used their microloans for consumption and risk mitigation purposes.
This suggests that current microcredit models need to be modified to better understand and respond to the needs of different groups of borrowers. For example, reducing repayment frequency requirements or including grace periods in microloan products could improve business outcomes and consumption, while also freeing up capital for costly and riskier higher-return investments.
Are they the right fit for my business?
For small businesses that need funding quickly and don’t meet the criteria for traditional business loans, microloans may be a great option. However, the loan terms and requirements will vary depending on the lender. It is important to review your options carefully before applying for a micro loan.
Another downside to micro loans is that they typically have higher interest rates than traditional loans. This is because they are not supplied by banks and aren’t held to the same regulations.
Also, the available amounts for a microloan are often less than what a small business needs. This means that if you are looking for funding to cover a larger expense, such as an unexpected repair or this month’s rent, a micro loan might not be the right choice.
When you are searching for funding, it is best to have a well-fleshed out business plan before applying. Many lenders will want to see this document before deciding whether or not to provide a loan. If you need help creating a business plan, there are resources available to guide you through the process. In addition, be sure to check your credit regularly. If you have a high credit score, it will be easier to qualify for a conventional business loan. If you aren’t sure a micro loan is the right fit for your business, consider other financing options, such as angel investors, personal loans from family and friends, or a business line of credit.
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