What Is Microfinance?
Sometimes life throws curveballs at you. Difficult situations and financial emergencies happen all of a sudden. Not many people are prepared for every disruption that occurs. Sometimes all you need is a few hundred dollars of extra funds to support your needs. In other situations, people need capital to start a new venture. In this article, we are going to talk about microfinance, how it impacts and benefits consumers in need. Keep on reading to find out various options that may help you choose the best solution tailored for your needs whether it is launching a startup or getting access to quick personal funds.
Let’s start with the basics of microfinance. What does this word mean and why did it become so popular? Microfinance can sometimes be called microcredit. This is a popular way of getting small funds for business or personal needs. People who want to start their business and need access to capital can request microfinance loans. Such borrowers often can’t access lending solutions from traditional crediting institutions such as local banks so they look for small personal loans from other sources.
Why does it happen? Consumers with poor credit or no credit history at all will most likely receive a rejection from conventional banks as such lending organizations don’t cooperate with such high-risk consumers. Banks provide financial options for people with decent credit as they offer low rates. Consumers are frequently obliged to provide collateral to secure the debt. However, low-income borrowers don’t have this opportunity so they seek alternative ways.
How Does Microfinance Work?
Are you a young entrepreneur trying to launch a startup? Are you a common consumer willing to get additional funds for your needs? Microfinance was initially started by Muhammad Yunus who was the Nobel-Prize winner. He aimed to assist marginalized consumers by offering them the necessary funding to launch a venture and work their way towards monetary independence.
“One of the greatest benefits of such lending is the stimulus given to borrowers who can’t qualify for other lending options,” said Muhammad Yunus. “Different people may utilize this funding in different ways – some people will start a small business, others will pay for tuition or healthcare. Microfinance allows consumers to get affordable interest rates to increase their purchasing power and boost their wellbeing.”
This lending term consists of not just small loans but also microinsurance and micro-savings. Thousands of people from low-income communities and rural areas won’t be able to qualify for lending solutions from conventional crediting institutions. Many consumers from developing countries opt for microfinance as a perfect solution tailored to their needs that allows them to strive for better living conditions.
The Impact of Microfinance
This is a useful lending solution for many people across the world. If you don’t have collateral and credit history you will most likely be rejected by the local bank or credit union. Microfinance is a great option for thousands of consumers especially those who want to launch a startup. This is your capital to invest in a small business. Of course, there are downsides as well. Such alternative loans come with extremely high interest rates as they are unsecured. Lenders want to protect their costs and make certain their funds will be returned on time. As there is a high risk of default, creditors request higher fees for their services.
Consumers are frequently asked to take special training courses to improve their financial literacy. We often talk about the importance of financial education as it improves your lives and helps you make smart financial decisions. Once again, learning about cash flow management, book-keeping, and other significant skills is essential when applying for microfinance. Many service providers will require borrowers to take training first before they issue the funds.
The Benefits of Microfinance
Microfinance can be beneficial not only for consumers in the USA but also in many developing countries. It can become a starting point for your career as an entrepreneur and improve the purchasing power of consumers. In fact, young business owners who don’t have collateral may obtain loans of up to $50,000 for their startup needs, according to the Small Business Administration. Here are the main advantages of microfinance:
- Collateral-free loans – this is probably one of the main benefits of such lending solutions. Plenty of consumers and entrepreneurs without collateral can utilize this option to fund their business needs and launch a startup. Of course, there are risks of default. But such loans allow consumers to obtain the funds without the hassle or tedious paperwork.
- Quick Decision – apart from conventional banks and other finance-related service providers, microfinance lenders make quick decisions tailored to the needs of the borrowers. Timing is important so you won’t need to spend long waiting hours or even days just to receive an answer.
- Meet Financial Needs – low-income households can’t often qualify for many crediting options. If you strive for improving your situation and need capital to launch a small business or fund other necessary things straight away, microfinance can be beneficial. Such companies grant access to funds and financial assistance even for low-income groups of borrowers.
- Variety of Loans – it is necessary to admit that microfinance doesn’t only comprise small business loans. Consumers may also request funds in the form of small personal loans or emergency loans for urgent monetary disruptions and other urgent needs. There are fewer formalities and faster processing compared to other lenders.
The industry of microfinance has become very widespread among consumers in many countries. It continues to expand today. Last year, there have already been almost 140 million borrowers who opted for microfinance. The vast majority of loans were taken in India, Bangladesh, and Vietnam, as it was mentioned in the Microfinance Barometer.
In conclusion, microfinance can be a valuable tool to provide quick financial assistance for people who want to boost their financial wellbeing and launch a small business. Thousands of financially underserved consumers resort to this lending option to fund their needs today.