Small and medium-sized business owners across the globe more or less share the same experience when it comes to meeting their financing needs. As a fellow founder, I am sure you can relate to the situation wherein you knock on the door at one bank to the next and keep getting rejected for a wide catalogue of reasons – from unverifiable credit history to poor credit score.Â
The situation for SMEs is so severe that the challenge of raising just USD 5000 in capital is equal to the severity of applying for a USD 5 million credit line. For instance, according to a latest IMF report, there is currently a USD 5 trillion SME financing gap across developing nations, and this gap is only increasing with every passing day.
Thus, it can be easily said that founders need access to some form of alternative financing to bridge this gap, and in this blog post, we will one of the best resources, SMEs can tap into.
What Is Micro Financing?
Microfinancing as an alternative mode of raising capital got its origins in developing nations such as Bangladesh and Africa, since at most emerging economies, small and medium-sized enterprises are excluded from traditional financing sources such as bank loans due to their lack of collateral, credit history or steady employment.Â
Although microloans as a concept has humble beginnings, a quick search on the internet will attract you towards the success it has achieved, both in uplifting businesses as well as individuals from poverty. Due to this, today, companies across developed economies such as Europe and the US also offer microfinance loans to early-stage businesses that wouldn’t otherwise qualify for bank financing. The best part, early-stage businesses can qualify for financing between USD 500 to USD 50,000 by applying to these microfinance companies.
Pros and Cons of Microfinancing
Now that you have a better idea about what microfinancing is let us explore some of the benefits as well as disadvantages associated with leveraging this financing option to fund your startup.
Pros
No Collateral
One of the most attractive benefits of leveraging a microfinance loan to fund your early-stage business is the fact that you need to pledge little or no collateral to secure approval. Since the approved amount is often less than that of a traditional loan, microlenders tends to do away with requesting collateral and instead assumes the risk for the loan themselves.
Affordable Interest
Another great feature of all microloans is the affordable interest rates they arrive with. For instance, according to latest reports by the U.S. Small Business Administration (SBA), microloans typically arrive with an interest rate between 12% to 18% per annum, which is much less compared to other traditional financing options. These affordable interest rates ensure that more businesses can apply for these loans and easily get their business funded.
Fast and Hassle-Free Process
Lastly, the approval process for microloans are often faster compared to their traditional counterparts. Unlike bank loans which take anywhere from 1 to 4 business weeks to process your application and approve the loan amount, microfinance companies typically processes applications in less than 2 weeks, given your business meets the lender’s eligibility requirements.
Cons
Small Loan Amount and Repayment Tenure
Although the benefits of applying for a microfinance loan are many, two of its most significant cons are the small loan amount and short repayment tenure. Whereas traditional financiers generally offer a repayment tenure of 5 to 10 years, microlenders restrict this to one year or less, causing financial strain among many early-stage business owners. Along with this, since the approved amount is restricted to USD 50,000, SMEs might need to look elsewhere to bridge their remaining financing gap.
Restrictions and Limited Options
Along with this, it may come as a surprise to most founders that microloans often arrive with certain restrictions, as in the lender might mandate you to use the approved amount only for the enlisted purpose and nothing else. Along with this, although microfinance has gained some popularity in the last few years, there are still only a limited number of microlenders in the market, making it harder for founders to find them.
Why Should You opt for Micro Financing?
Although the approved amount for microfinance loans are often small, for most early-stage business owners, this is a lifeline worth applying for. As stated earlier, for many startup founders raising their first five thousand dollars is equal in effort and obstacles to applying for a five-million-dollar credit line, and thus the on-ground situation is grave.Â
For instance, according to latest insights by Intuit Canada, more than 58% of all SME owners start with less than 5000 USD, and this figure is higher for businesses having a single owner. Due to these reasons, microloans are naturally in high demand, and many modern businesses are considering them as their first financing option.
Along with this, microfinancing arrives with certain innate advantages, such as having a personal touch, the support of a group and, most importantly, greater accountability.
Generally, microlenders tend to spend a lot of time learning about the business and its founders before approving the loan, giving it a more human touch. Along with this, lenders often empower business owners with access to a support group to ensure they accurately assume accountability and, even better, support each other’s businesses in getting funded and bridging the financing gap.
Today, there are many microlenders spread across both developing and developed nations, and as per recent estimates, this number is steadily increasing, making financing accessible to more businesses in need.
In Conclusion
Although the thought of applying for a microloan might come immediately to your mind when you think of financing your early-stage business, today, it is an easily viable option. Along with this, startup founders can also tap into other alternative financing sources such as paylater direct term loans and recurring revenue financing to further bridge their financing gap.Â
If you are looking to finance your early-stage business without losing equity or pledging personal collateral, reach out to us at CrediLinq.ai today. At CrediLinq, we have designed innovative alternative financing solutions for businesses like yours to empower you in this increasingly competitive market. Get in touch to learn more.
