Comparing Business Loans and Micro Loans. Raising funds for business is a common challenge faced by small business owners. In the last few years, government bodies as well as private players have recognized this gap between MSMEs and access to finance and have taken various steps to bridge it. Now various government schemes provide small business loans for MSMEs. Moreover, there are private NBFCs and tech-driven nonfinancial companies that offer a wide range of finance options for small business owners.
Among the various funding tools, business loans and microloans are more popular owing to its ease of access and flexibility. Both business loans and microloans come with a set of pros and cons, and choosing the one that is best suited for your business requirements is often a difficult task. As a business owner, it is essential to understand when you should apply for each of these loan types.
In this blog, let us compare the pros and cons of regular business loans and microloans, which will help you to make an informed decision in fund-raising.
Defining business loan and microloan
Business loan: As the name implies, a business loan is provided to businesses to meet various requirements such as procurement of office equipment, working capital management, expansion of existing business, etc. It is provided by traditional financial institutions as well as non-banking financial institutions.
Microloan: Microloans are small loans given to individuals to meet the financial needs of the business. It is provided by a single individual or a group of individuals who contribute a portion of the amount. Business innovations in the financial sector have facilitated the growth of microloans, and there are many digital platforms for connecting the lenders and borrowers now.
How is microloan different from a business loan?
A conventional business loan differs from microloans in multiple ways, even though both the funds are given to meet the economic needs of businesses. Let’s analyze how it is different in various aspects of taking a loan.
- Loan Amount
The significant difference between a traditional business loan and a microloan lies in the amount of money obtained. Although both the loans have a maximum limit for the loan, the limit for a business loan is higher compared to that of microloans. The maximum limit of microloans can be as low as 1 lakh while that of large business loans can reach up to billions.
- Interest rates
Secondly, the interest rates of business loans and microloans vary significantly. This is mainly because lenders of microloans consider interest as profit. Microloans are mostly short-term loans, say for a few months to one year. Hence the interest rates will be on the higher end. The tenure of the business loan may go up to ten years, and the interest rates will be lower compared to microloans. Therefore, it makes an affordable option for business owners.
- Fund utilization
Microloans are specifically designed to help businesses to keep it running and scaling up. It can cater to specific business requirements such as funding a marketing campaign, maintain liquidity, buy inventory, purchase of equipment, etc. However, it is hardly possible to get microloans for debt repayments or pay-offs. A business loan from financial institutions will not carry such limits in fund utilization; hence can be used for debt repayments as well.
One significant advantage of microloans over regular business loans is its availability. For example, there are a lot of steps involved and document work required in availing a business loan from traditional financial institutions. A majority of banks ask for a personal guarantee or security collateral for giving loans, and the creditworthiness of the borrower is very significant in a loan approval. Thus, it becomes a time-consuming and stressful task for small business owners to get a business loan.
On the other hand, getting microloans are becoming far easier with the development of financial technologies, which is commonly referred to as fintech. The new-age micro loan platforms take advantage of data to determine the creditworthiness of a borrower than the conventional means. Thus borrowers can avail small business loans without any collateral. This data-driven decision-making leaves no room for subjective choices of banks or financial institutions, hence increases the chance of loan approval.
Although India is one of the fastest-growing economies, a majority of the population remains unbanked even now. With the advent of microloans and mobile finance, the accessibility of borrowers and lenders to brick and mortar store is not valid anymore. Microloans are accessible by anyone using a mobile phone and internet connectivity, which is its significant advantage over a business loan from traditional banks.
Business loans and microloans remain two popular methods of raising finance for business requirements. Although business loan offers huge amounts of money at low-interest rates for a long tenure, it is not easily accessible for small business owners due to diverse reasons. Alternatively, microloans have become a boon for small scale business owners and entrepreneurs to meet the economic needs of their business efficiently and quickly, although the interest rates remain higher.
The financial landscape of India is fast changing with the evolution of fintech start-ups that offer flexible microloans to borrowers without collateral and low-interest rates. According to a study report, the Indian microfinance market is expected to grow at a double-digit CAGR during the tenure 2019-2024, majorly driven by the growing number of small and medium industries in India. It is emerging as a reliable tool for addressing the credit requirements of small business owners across the country.
Are you in need of financial assistance to scale up your business operations? Allow us to help you. Indifi offers customized and collateral-free loans for small business owners at competitive interest rates. You can apply for a quick business loan through our online lending platform. We ensure your fast processing and swift disbursement of the loan.