Micro Loans: Key to Small Business Growth

Small businesses form the economic backbone of our country. However, they face a variety of challenges such as limited resources, unpredictable cash flows, and stringent eligibility criteria for traditional loans. A startup business loan can give a big boost here, especially when it comes to securing the necessary capital for growth and sustainability. Let us discover the transformative power of online micro loans, particularly in the context of small and startup businesses. We will also understand the typical challenges these enterprises encounter and the impact micro loans have on the growth of small businesses. Microloans in India are a major driving force behind the success that small businesses have been achieving lately.

What are micro finance scheme?

Micro loans are often categorised under MSME (Micro, Small, and Medium Enterprises) financing. They are specifically designed to address the unique needs of small businesses. These loans, typically ranging from a few thousands to a few lakhs, provide the dose of capital required for various purposes, from debt repayment, operational expenses, to expansion initiatives. Startup business loans are a form of MSME loans too.These schemes are great for businesses having less than sufficient working capital. It helps businesses navigate through tough times by injecting much required capital in the form of debt financing. Micro financing can help an entrepreneur set up a new business, help with generating required working capital, it also helps businesses make important decisions such as investing in research and development, expansion into new products and markets, investing in new business verticals, funding special projects, etc. It can help entrepreneurs navigate through cyclical or unexpected business downturns and seasonal sales drought to keep the business afloat. Microloans are great if used wisely!

Also Read: Top 5 Government Loan Schemes for Small Business in India

Features and Benefits of Micro finance Loans

1. Tailored Loan Amounts:

Micro loans are designed to meet the specific financial needs of small businesses. Therefore, they offer the flexibility of borrowing modest amounts, unlike traditional loans that may have high minimum borrowing thresholds. These loans are often taken to cater to a specific business need which may require varied amount of fund injections, having tailored loan amounts help entrepreneurs with efficiently using capital, as these loans comes with an interest component, hence having a surplus of loans which is not being utilized efficiently may add to the interest costs for an amount simply lying as a surplus. To avail these loans easily, the applicant should have a good credit history and the business should have healthy fundamentals for the loans to be a less risky investments for the lenders, low risk investments for lenders translate into lower interest rates and favorable loan terms for you.

2. Efficient Online Processing

One of the defining features of online microfinance business loans is the seamless and efficient online processing. Due to tech advancement, assessing a microfinance business loan application has become increasingly swift and easy for the lenders, collating data points around an applicant’s credit history, loan repayment history, any delayed payments in past, number of loans active and closed, is available with a few clicks, this coupled with intelligent systems which can help the lenders to take a decision of approving or rejecting application and if approving then the interest rate and loan terms that are to be offered has made the assessment process really quick and efficient. Once the application is received, lenders are then able to make these decisions in a lightning quick speed. Conventional loans often involve lengthy paperwork and complicated processes. On the other hand, micro loans leverage digital platforms for a swift application and approval process. This not only saves valuable time for businesses but also ensures a quicker disbursal of funds, addressing urgent financial needs without unnecessary delays.

3. Flexible Repayment Structures

Micro business loans offer flexible repayment structures that align with the specific revenue cycles and financial capacities of businesses. This adaptability allows you to choose repayment schedules that best suit your operational patterns, reducing the financial strain associated with fixed monthly payments and promoting sustainable debt management. The repayment structures are highly flexible in terms of tenure as well as frequency of repayment. This helps both entrepreneurs as well as lenders. For entrepreneurs, having flexible repayment structures helps them navigate through business cycles without worrying too much about the repayment schedule as it is designed to best suit their business requirements and ease of repayment.

4. Collateral-Free Accessibility

Lenders understand that an entrepreneur starting afresh with a MSME business may require a nominal to substantial funding to start as well as keep the business afloat in the initial days, and the entrepreneur may not have access to pledgeable assets, which makes it really difficulty to secure debt financing since conventional loans often require a collateral if you have a less than sufficient credit history, if your business doesn’t have enough revenues to give the lenders headspace that their debt financing is less risky or if it’s a new business. To overcome these challenges faced by small business owners, the government and lenders both actively promote lending of micro finance loans for easier access to debt capital. This easier access to debt helps entrepreneurs, the lender and the government. For entrepreneurs – It is an efficient and easy source to secure microloans with the hassle of pledging a collateral, for lenders, micro finance loans diversify their total loan books and decreases the company level risks associated with non repayments since these loans have usually a low ticket size. It also helps the government as small businesses are able to operate and thrive which helps generate wealth and employment in the country. To fulfil their objective of supporting small businesses, micro loans often come with the added advantage of being collateral-free. This means you can borrow the capital needed for your business without having to pledge any assets as security. The absence of collateral expedites the loan approval process and also makes these loans more inclusive. However, the availability of collateral-free/unsecured loans may vary across lenders.

5. Varied Loan Tenures

Different small business and startups needs may require different timeframes for repayment. As such, startup business loans offer varied loan tenures to accommodate the diverse financial goals of small businesses. Businesses can choose a loan tenure that aligns with their objectives for a more sustainable financial arrangement.

6. Transparent Fee Structures

To empower businesses with informed decision-making, online micro loans often come with transparent fee structures. Lenders provide clarity on interest rates, processing fees, and any other associated charges. This transparency not only builds trust between lenders and borrowers but also enables small business owners to accurately assess the cost implications of the loan, making well-informed financial choices.

7. Quick Turnaround for Repeat Borrowing

Recognising the ongoing financial needs of small businesses, micro loans typically offer a quick turnaround for repeat borrowing. Once a business establishes a positive borrowing history and repays its initial loan, subsequent loan applications can be processed even more efficiently. This feature encourages a long-term partnership between businesses and lenders, fostering a supportive financial ecosystem. This long term partnership would be beneficial for the borrower in multiple ways – Easier processing of loans for future requirements, favorable interest rates if the past repayment records are positive, positive impact on credit score citing a long term active loan, easier application for a line of credit which may help serve any short or long term needs and requirements of the business. Having a long standing and reliable partnership with lenders may get you prioritized for a new debt offering with attractive offers in the future.

8. Credit Score Enhancement

Timely repayments of your micro loan EMIs contributes to building a positive credit history. This comes in very handy for future loans, line of credit requirements, and other transactions with financial institutions. For every loan you apply or take, all the information is stored on your PAN. Information on active and closed loans, any bad remarks on a previous loan, any default, late payments, current credit utilization, etc is all available for the lenders to check. Based on this information lenders make a call to either approve or reject loans and also decide on loan terms like interest rates and repayment schedule. Hence, maintaining a good credit record is imperative.

Also Read: Mahila Samridhi Yojana – Loan Scheme

Important Considerations for Small Businesses

As you can see, the advantages and impact of online micro loans on your small business can be immense. However, like any financial instrument, they should be used judiciously to draw the most benefits. Here are some key aspects for you to keep in mind:

1. Interest Rate Dynamics

Understanding the interest rates is crucial for small businesses opting for such loans online. You need to carefully assess and compare rates across various lenders and, also, any additional charges, fees or penalties that may impact the overall cost of the loan. Furthermore, you should thoroughly review the terms and conditions provided by the lender to have total clarity on all aspects of the loan agreement.

2. Repayment Periods

You should be mindful of the repayment periods associated with micro loans. Unlike long-term loans, micro loans typically come with shorter repayment terms. While a longer tenure may lower your monthly EMI, you may end up paying more in the form of interest amount. You should evaluate the cash flow projections of your business to ensure that you can comfortably meet the repayment obligations within the stipulated time frame.

3. Loan Utilisation Planning

Before acquiring a micro loan, you should diligently plan how the funds will be used. This involves identifying specific areas where the infusion of capital will have the most significant impact on the business. Examples include – addressing immediate working capital needs, investing in marketing initiatives, or procuring essential equipment.

Applying for a micro business loan is a great way to fund your short term business requirements, as these loans are designed to serve short term funding issues and come with a lower tenure and are often collateral free. Business loans can be availed easily, however as highlighted above, the borrower should be very mindful to use the funding efficiently and productively. Not productive use of microloan will only increase the expenses in form of interest payments and not increase productivity. This would be harmful for your working capital as a bigger amount will go towards interest repayments while it could’ve been used for productive measures in the business.

4. Customer Support Evaluation

Assessing the responsiveness and helpfulness of customer support services is another vital consideration. You may encounter questions or issues during the loan application or repayment process. A lender with accessible and supportive customer service can provide valuable assistance, ensuring a smooth borrowing experience.

5. Impact Of Micro Loan

The impact of online micro loans on small business growth is significant. Micro loans can be a stepping stone for establishing long-term success in the industry or segment that you operate in. They’re easy to avail of and convenient to repay as well, giving you the infusion of capital when you need it the most.

Small businesses should consider lenders who demonstrate a commitment to supporting their growth journey. In your pursuit of financing options for your business, you will encounter several lenders. However, one platform that stands out is Lendingkart. With a commitment to simplifying lending for small businesses, Lendingkart offers seamless unsecured startup business loans and online micro loans with flexible loan tenure and repayment terms, higher borrowing limits, and competitive interest rates, making it an ideal choice for small businesses seeking financial empowerment. Choose Lendingkart and embark on a journey of sustained business growth.

Also Read: How Do Consumers Use Microlending

Summary:

Small enterprise, an integral part of any economy, always operates with the challenges of scarce resources and stricter loan requirements; that’s why the very existence remains purely contested. Microfinance, especially online microloans, is a vital solution that overcomes these obstacles by giving the right kind of capital to start-ups and small business owners to fuel growth and sustainability. In India, microloans have been significantly responsible for the success of small enterprise operations-fittingly defining micro credit meaning by empowering entrepreneurs.

What is a microloan? Microloans are specifically designed for MSMEs. Loans extend from a few thousand to several lakhs wherein the money is returned after a specified period, and it caters for operating costs, debt repayment purposes, or expansion. The main benefits of a microloan are that the loan amount is customized to the needs and requirements of the business, thereby reducing unrequired costs arising from payment of interest. In addition, an online processing that is efficient through a micro loan app, the application process is fast and accessible as compared to traditional loans.

The repayment structures of microloans are versatile in terms of business revenue cycles, thereby reducing financial pressure. Most microloans are collateral-free, which is thus making it easier for the startup to access funds without having to mortgage assets. Microloans come with varied loan tenures to support a range of financial goals.

Microloans also enhance the credit ratings of the borrowing customers through punctual repayments, thus forming a basis for further access to funding. Knowing what micro finance is and how the interest rates, repayment periods, and funds are utilized effectively is basically instrumental in reaping all the benefits that these loans offer. Generally, microfinance forms a powerful tool to facilitate small business growth because it leads to financial empowerment and long-term successes. Lendingkart also makes it easy to get into these loans so that small businesses can easily source capital in the evolving space of micro loans in India.

Frequently Asked Questions

What Distinguishes Micro Loans From Traditional Loans?

Micro loans are tailor-made for small businesses. They allow you to borrow modest amounts with hassle-free processing, flexible repayments, and quick disbursals.

How Can Micro Loans Benefit Startup Businesses?

Online micro loans facilitate startup growth by providing accessible capital for operational expenses and expansion initiatives. They can also contribute to debt consolidation and help build a positive credit history (if you repay in a timely manner).

What Challenges Might Small Businesses Face When Opting For Micro Loans?

Challenges may include higher interest rates and shorter repayment terms. Another challenging task can be choosing a transparent lender that can partner in the journey of your business’s growth.

What Documents Are Typically Required For A Micro Loan Application?

Commonly required documents include proof of business registration, financial statements, and a detailed business plan outlining fund utilisation.

How Can Businesses Ensure Timely Repayments For Micro Loans?

Timely repayments can be ensured through strategic planning, regular financial assessments, and fostering a positive credit history.

Why Is Lendingkart A Preferred Choice For Sme Loans?

Lendingkart stands out for its commitment to simplifying lending for small businesses, offering seamless SME and startup business loans with competitive terms and a customer-centric approach.

Can Micro Loans Enhance A Business’s Credit Score?

Yes, timely repayments of micro loans can contribute to a positive credit history, boost your business’s credit score and make future financing opportunities easier to secure. A good credit score is also likely to get you loans at more competitive interest rates and better repayment terms.

How Do Micro Loans Support Business Expansion Initiatives?

Micro loans provide accessible capital that can be strategically allocated for business expansion, working capital, and equipment purchases, fueling growth initiatives.