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 million people have benefited from microfinance directly or indirectly. In addition, the IFC has assisted developing nations in the improving credit reporting bureaus in 30 nations, and advocated in adding relevant laws with regards to financial activities in 33 countries.
Furthermore, the benefits of microfinance extend beyond providing a source of finance for businesses to grow. It also creates jobs and acts as a source of over all economic improvement and market growth. Empowering women in particular, as many MFIs do, leads to more stability and prosperity for families.
Entrepreneurs might have a successful business plan but lack adequate funds to start a business or run the start up in the beginning. Microfinance, in such cases, provides enough funding for the business to take off and generate revenue. The loan can be eventually paid off with the business profits.
Access to Funding
The underprivileged entrepreneurs obtain financial assistance by taking credits from acquaintances which might turn out to be expensive. Since financial bodies, such as banks, do not approve underprivileged customer’s loans considering their business history or bad credit history, micro-finance foundations make it simpler and easier to take a small loan.
Microfinance can give a small business enough capital stability, which gives them financial security from sudden monetary problems. How much risk is there with a $1000 loan? This small level of working capital is sustainable because it’s essentially a forgettable amount. If there is a default on that money, the interest and high repayment rates of other microloans will make up for it. Then repayments are reinvested into communities so that the benefits of microfinance can be continually enhanced. Each repayment becomes the foundation of another potential loan.
Microfinance helps businesses to create new employment opportunities that can benefit the overall economy. The more people work the more revenue is generated. More than 21,000 people are employed by Grameen Bank, using financial products related to microfinance, in Bangladesh. The company has created thousands of jobs to help unfortunate individuals come out of poverty.
Microcredit empowers women since they are the major beneficiaries. In the past, women were not able to participate in economic activities. Microfinance institutions now provide women with the capital they require to start business projects. This gives them more confidence and allows them to participate in decision making, thereby encouraging gender equality.
When the basic needs of individuals or businesses are met, the left over amount naturally goes to savings for emergencies. These savings creates the possibility of future investments and help in generating more income. There has been an unprecedented amount of savings noted by some microfinance institutions as a result of business extension. According the Unit Desai of Bank Rakyat Indonesia, 28 million savers have been counted to just 3 million microloan borrowers.
According to Investopedia, many microlenders allow borrowers to work together to repay their loans, helping each other when needed. This holds borrowers more accountable for their repayments, which in turn leads to better credit and sets them off on the right foot.