by Catia Mondlane, Founder Estética & Cosméticos
Are your day-to-day financial needs making it difficult for you to maintain and grow your business operations? This is the problem that small businesses often face when they reach a certain point. There is nothing to be worried about, as there are many options you can choose to manage your financial needs. Micro-loans are considered to be an attractive option for businesses that are going through such kinds of issues.
However, some business owners think that the micro-loans won’t be able to accommodate their needs. As the name suggests, you can obtain a limited amount of money with micro-loans. But the question that appears in everyone’s mind is whether the granted amount will be enough for managing their financial needs or not.
We believe the small businesses must look for micro-loans before they start searching for larger business loans, because the larger business loans come with strict terms and conditions, and you’d lose some assets if you couldn’t pay off the loan on time.
In this article, we’ll describe the characteristics of Micro-loans to help you understand whether they will accommodate your needs or not. So, let’s dive into the details of how a micro-loan can help your small business.
What are Micro-loans?
No matter whether you need help with immediate financial obligations or daily operations, the micro-loans can be the best solution for you. The small businesses now have an incredible financial solution that they can use to carry out several operations. The important thing about these loans is that you can get a specific maximum amount of money with these loans. We can say that the micro-loans are the smallest loans available to SMEs. Therefore, micro-loans are also known as short-term business Loans.
What are the Benefits of Micro-loans?
This is the most important part of this article that will help you decide whether the micro-loans are a suitable option for your financial needs or not. The small businesses that are short on cash can take advantage of the micro-loans to accommodate their day-to-day financial needs. These loans provide you with the small amounts of financing that you can use for different purposes. The remarkable thing about micro-loans is that they release the cash quite quickly.
For instance, there are some financial institutions that will release the funds within 24 hours. However, you need to be eligible for the loan; otherwise, you’d have to go through a long and difficult process. The companies that need instant access to the cash can take advantage of this amazing opportunity to manage their business processes.
The interest rates charged on micro-loans can vary in different situations. Usually, the banks use your previous credit history to decide interest rates. However, the interest rates charged on micro-loans are lower than many other loans. Therefore, micro-loans are considered to be the perfect option for small businesses. But you’d need to prepare a strong and effective application to qualify for the micro-loan because some financial institutions have very strict rules and regulations for these loans.
What are the Costs of Micro-loans?
In terms of interest rates, the micro-loans can never beat the long-term loans because micro-loans charge around 6-16% interest rate on the total amount. The reason why lenders charge a higher interest rate on micro-loans is that they want to make the most of their investment. And the micro-loans cannot bring them any benefits unless they charge higher interest rates. On the other hand, the long-term loans come with the longer return profiles due to which the lenders offer lower interest rates for these loans.
However, the micro-loans are still a better option as compared to the Crowdfunding Platforms because the interest rates for micro-loans start from 6.75%. Moreover, the Crowdfunding platforms can only offer the loan up to a certain value while the micro-loan provides you with the facility to get specific amounts.
Another interesting thing about micro-loans is that they offer the repayment period of up to 4 years, while the repayment period for Crowdfunding Platforms is only up to 6 months. So, micro-loan is a great deal for small businesses. But the reason why many people choose the Crowdfunding platforms is that the eligibility requirements of these platforms are a bit lenient as compared to the banks. However, if you can fulfill the eligibility requirements of Micro-loans, you’d be able to enjoy amazing benefits.
What Type of SMEs Should Consider Micro-loans?
Micro-loans are the perfect solution for SMEs that are facing problems in running their business operations due to a lack of finances. If your financial needs are different, you must for other financing options available for different types of businesses. These options are supposed to facilitate the businesses in different situations so they may not lose hope.
For instance, traditional business loans are the recommended option for larger businesses that can easily qualify for longer-term loans. The reason why we recommend these loans is that they have lower interest rates. Similarly, equity financing is an alternative for businesses that aren’t capable of making interest payments. Additionally, businesses that need large amounts of financing can also take advantage of equity financing.
Cátia Mondlane is a CEO & Founder of Isabella – Estética & Cosméticos, an innovative Mozambican cosmetic company that brings natural skin solutions based on locally sourced organic and fresh ingredients. Her brand is especially for people with sensitive skin and who want to be kind to their skin at affordable prices. She is currently based in Maputo, Mozambique.