What Are Micro Loans and How Can They Benefit Small Businesses?

As a business owner, how many times have you held back your growth plans due to a lack of extra funds? Low working capital is common for businesses, limiting their growth. Micro loans can make the necessary difference by assisting a company’s growth and expansion plans. 

Since obtaining a traditional Business Loan is a lengthy process, most business owners do not proceed with the application due to fear of rejection. Micro finance is a banking service available to smaller businesses that otherwise do not have access to borrowed capital. In the following sections, we will explore what are micro loans and how they benefit small businesses.

A micro loan differs from traditional Business Loans in many ways:

• The loan amounts are minuscule
• Repayments are flexible
• EMIs are smaller
• No collateral is necessary 
• Easy eligibility and minimal documentation requirements 

The primary aim of micro finance is not only to provide credit but also facilitate business growth and expansion. These loans empower business owners with much-needed financial support by offering small loan amounts with flexible terms. 

Significance of Micro Financing

Micro finance places SME owners at the industrial forefront. Instead of liquidating their assets or exhausting their savings, small business owners can turn to micro loans to access funds required for their business growth easily. One of the best things about this funding option is that it offers small entrepreneurs an opportunity to scale their operations without providing any collateral. That means they can make better innovations with ultimate peace of mind. In a diverse country like India, the market becomes fairer and no one stays left out.

How Do Microloans Work?

Micro loans are easily accessible through online loan companies like Hero FinCorp. These loan plans typically have lower interest rates than traditional Business Loans, but the loan amount is also smaller. The application process is much quicker and simpler, as most online lenders support 100% digital application procedures one may complete in minutes. 

When SME owners apply for a micro loan, they must provide the necessary information to submit the application. This includes details about the owner, business, and finances. The lenders then review the application and decide whether to approve or reject it. If the applicant fulfils the eligibility criteria, the lender checks their income and repayment capacity to determine their loan amount, interest rate, repayment tenure, and other terms and conditions. 

If they approve the loan, they send the applicant a loan offer outlining the loan terms, such as the loan amount, interest rate, repayment schedule, additional charges, prepayment option, etc. Once the applicant signs the loan agreement, the lender disburses the loan amount directly to their bank account. The borrower can use the loan amount for any business purpose they want without any end-use restrictions.

Top Benefits of Micro Loans for Small Businesses

The popularity of micro loans has increased exponentially in the last few years as more and more SMEs in India seek alternative financing options. They are great funding sources for small businesses for the multi-faceted benefits they offer. Here are the top benefits of micro finance for small businesses:

• Easier to Qualify than Traditional Loans: Since micro loans are smaller in size and have shorter terms than traditional Business Loans, they have easier eligibility conditions that most SME owners can fulfil. This is especially helpful for business owners who do not have a high credit score or collateral to pledge as security.
• Provide Quicker Access to Capital: Another benefit of these loans is that they provide access to the required capital quickly. They are easier to apply and have minimal formalities to handle. Therefore, SME owners get immediate funding for their planned or urgent expenses. 
• Can be Used for Various Purposes: Most lending institutions offering micro finance do not impose end-use restrictions on their loans. Therefore, borrowers can use them for various purposes, including inventory purchases, equipment upgrades, working capital management, business expansion, etc. This level of flexibility makes these loans the best financing option for small businesses. 
• Help Build Credit: Most micro loan seekers do not qualify for traditional Business Loans due to low credit ratings. Micro loans have flexible repayment terms that borrowers can choose according to their repayment capacity. Using a Business Loan EMI calculator, they can choose an EMI plan that they can easily adjust into their monthly budget. With regular EMI repayments, they can gradually build credit and qualify for traditional Business Loans with bigger loan amounts and lower interest rates. 
• Lower Interest Rates than Many Other Funding Options: Interest rates on micro finance are typically lower than those on other financing options, such as business credit cards and lines of credit. The lower interest rates of these loans help save money on interest payments over the tenure.
• Option of Early Repayment: Many lending institutions allow loan prepayment before the term ends. This option is helpful for business owners who want to use their business profits to repay their debt and save money on interest payments.

Steps to Apply for a Micro Loan

Planning to apply for a micro loan from a trusted finance company? Here’s how to do it:

• Research and compare the loan offers to find the best loan deal.
• Review the eligibility criteria and the required documentation.
• Prepare the documents to submit when required.
• Fill out an online application form accurately with all the necessary details.
• Submit the application form with supporting documents.
• Once the lender approves the application, they will send a loan offer with the approved loan details. 

Micro loans are great financing options for small businesses. They provide quick access to capital without end-use restrictions. Additionally, these loans have lower interest rates, and timely repayment helps build credit. Use a Business Loan EMI calculator to choose a repayment schedule most suitable to the monthly budget and repayment capacity. Those looking for unsecured micro loans for businesses can apply online at the Hero FinCorp website or app to get quick funding.