Micro Loan

Small businesses make up for a large percentage of the economy coming into the Indian government. However, start-ups like these often struggle to meet their financial requirements which are needed to run their businesses, creating undue hold ups in sustenance. In such situations, micro loans are very helpful in providing small financial aid to small businesses, including start-ups, micro enterprises/entrepreneurs, self-employed professionals and other individuals who have low capital requirements.

What are Micro Loans?

Micro loans are short-term loans which comprise of smaller loan amounts which are extended to lower income entities including micro-enterprises/entrepreneurs, low income group families, start-ups, small businesses and basically anyone who is falling short of financial aid to run their businesses and have little to almost no access to this aid.

Basically, it is how insurance, credit, money transfers and access to savings accounts are made available for such business owners, more so in the underdeveloped part of the nation. Usually, the recipients of such loans are mainly those who are unable to avail traditional loans such as business and personal loans.

The government of India is helping Reserve Bank of India (RBI) in reaching out to the under banked as well as unbanked people to help then with funding by partnering with micro finance companies (MFCs) and private limited companies. While the primary objective of these short-term loans is to offer financial aid to such companies, it also aims in the smooth functioning of socio-economic development, promoting start-ups, reinforce self-help groups and also encouraging female entrepreneurs to become more independent.

Key Objectives of Micro Finance Loans

The key objectives of micro loans are stated below;

1. Promoting socio-economic development 
2. Promoting start-ups 
3. Reinforcing self-help groups 
4. Encouraging female entrepreneurs to be more independent 
5. Offering financial aid to start-ups to operate successfully

Who Avails Micro Finance Loans

The following types of entities, mainly engage in availing micro loans;

1. Unemployed people 
2. Female entrepreneurs 
3. Sole proprietorship
4. Small scale retailers 
5. Small scale traders 
6. Small scale manufacturers 
7. Consultants 
8. Start-ups
9. Self-employed people 
10. Minimum wage workers/labourers
11. Minorities 
12. Low income group 
13. Unbanked or under banked people

Micro Loans: Features

Stated below are the key features of micro loans;

1. They are eligible to give a loan amount ranging from Rs. 50,000 – Rs. 1,50,000 to people from urban and rural areas 
2. They offer financial aid to low-income groups through relaxed provisions 
3. They encourage small businesses and start-ups to function successfully 
4. They have higher interest rates as compared to traditional loans 
5. They are short-term loans 
6. The loans that are availed microfinance are of small amounts 
7. Income generation is the main purpose of such loans 
8. Borrowers of micro loans usually hail from low income backgrounds

Micro Loans: Advantages

The following mentioned benefits can help determine if you wish to apply for a microloan;

1. Despite the loan amounts being small, you can still get up to Rs. 45 lakhs with micro loans, provided you meet the eligibility criteria
2. There is a flexible payment tenor with micro loans which you can pay back within 84 months. This can be selected by you as per your convenience, as long as it is within the stipulated 84 months deadline
3. Acquiring a micro loan involves very little paperwork and a quick online application process
4. Micro loans offer prompt disbursal of funds once the application has been approved
5. Requires minimal documentation work 
6. Urgent fund requirements are met due to the quick disbursal of loan amount, offering extreme convenience to those in need, even during unanticipated financial requirements 
7. In addition to funding small entities and entrepreneurs, micro loans can also provide housing loans, working capital loans and business loans 
8. There is a flexi loan facility offered in which you can withdraw the money as and when you require from the approved limit. In such a situation, you will only be liable to pay interest on the actual amount borrowed and not the entire sanctioned amount
9. Payments can be done in easy monthly instalments (EMI’s)
10. Micro loans are collateral-free loans which makes the paperwork less cumbersome and hassle-free, not to mention the reduced stress of holding any assets against capital borrowed
11. Micro finance loans promote self-sufficiency and also provide a sustainable profit in the long run

Micro Loans: Disadvantages

While we have gone over the advantages and features of micro loans, it is also imperative to take note of the disadvantages, however few they might be. 

1. Harsh repayment criteria: Micro finance companies have the authority to impose harsh repayment options in the absence of legitimate working compliances and protocols. This can cause a state of financial crisis and added debt so one must be careful to not get manipulated by unethical repayment practices. 
2. Higher Interest Rates: Micro finance companies, despite working in compliance with RBI, do not offer low-interest rates on repayment. Since they do not follow the same trends as traditional bank loans in which accumulation of funds can be cumbersome for them, the operating cost becomes high and the borrower has to pay higher interest rates. However, this is a small price to pay, considering the numerous advantages of micro loans. 
3. Small Loan Amounts: Micro loans, as the name suggest, offer micro loan amounts, apt for smaller and low income businesses, entities and entrepreneurs. Due to no collateral being held against the amounts, they are unable to disburse higher amounts.

Types of Micro Finance Options

There are mainly three types of micro finance loans which are: