Microfinance, also known as microcredit or microloan, is a financial service that offers loans to low-income individuals, groups or entrepreneurs and small business owners who don’t have access to traditional sources of capital, like banks or investors.
The main objective of micro-finance is to providing start ups with money to support their businesses, especially those with poor credit. The average microloan is anywhere $35,000 to $50,000, as stated by SBA.
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Benefits of Microfinance
According to an estimation by the World Bank, more than 500 millionÂ people have benefited from microfinance directly or indirectly. InÂ addition, the IFC has assisted developing nations in the improving creditÂ reporting bureaus in 30 nations, and advocated in adding relevant lawsÂ with regards to financial activities in 33 countries.
Furthermore, the benefits of microfinance extend beyond providing aÂ source of finance for businesses to grow. It also creates jobs and actsÂ as a source of over all economic improvement and market growth.Â Empowering women in particular, as many MFIs do, leads to moreÂ stability and prosperity for families.
Entrepreneurs might have a successful business plan but lack adequateÂ funds to start a business or run the start up in the beginning.Â Microfinance, in such cases, provides enough funding for the businessÂ to take off and generate revenue. The loan can be eventually paid offÂ with the business profits.
Access to Funding
The underprivileged entrepreneurs obtain financial assistance by takingÂ credits from acquaintances which might turn out to be expensive. SinceÂ financial bodies, such as banks, do not approve underprivilegedÂ customerâ€™s loans considering their business history or bad credit history,Â micro-finance foundations make it simpler and easier to take a smallÂ loan.
Microfinance can give a small business enough capital stability, whichÂ gives them financial security from sudden monetary problems. HowÂ much risk is there with a $1000 loan? This small level of working capitalÂ is sustainable because itâ€™s essentially a forgettable amount. If there is aÂ default on that money, the interest and high repayment rates of otherÂ microloans will make up for it. Then repayments are reinvested intoÂ communities so that the benefits of microfinance can be continuallyÂ enhanced. Each repayment becomes the foundation of anotherÂ potential loan.
Microfinance helps businesses to create new employment opportunitiesÂ that can benefit the overall economy. The more people work the moreÂ revenue is generated. More than 21,000 people are employed byÂ Grameen Bank, using financial products related to microfinance, inÂ Bangladesh. The company has created thousands of jobs to helpÂ unfortunate individuals come out of poverty.
Microcredit empowers women since they are the major beneficiaries. InÂ the past, women were not able to participate in economic activities.Â Microfinance institutions now provide women with the capital theyÂ require to start business projects. This gives them more confidence andÂ allows them to participate in decision making, thereby encouragingÂ gender equality.
When the basic needs of individuals or businesses are met, the left overÂ amount naturally goes to savings for emergencies. These savingsÂ creates the possibility of future investments and help in generating moreÂ income. There has been an unprecedented amount of savings noted byÂ some microfinance institutions as a result of business extension.Â According the Unit Desai of Bank Rakyat Indonesia, 28 million saversÂ have been counted to just 3 million microloan borrowers.
According to Investopedia, many microlenders allow borrowers to workÂ together to repay their loans, helping each other when needed. ThisÂ holds borrowers more accountable for their repayments, which in turnÂ leads to better credit and sets them off on the right foot.