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The INs and OUTs of Micro-financing Your Small Business

If you ask any small business what the biggest challenge has been for starting out, most entrepreneurs would probably mention financing high up on the list. Getting your business up and running is a tough challenge, and it’s not made any easier by having to attract investors or banks on your side. While venture capital and angel investing have been the buzzwords in recent years, micro-financing is becoming an increasingly popular and a viable option for small businesses. So, what is micro-financing all about?

What Is Micro-Financing?

Micro-financing refers to any sort of financial arrangement, such as a loan or insurance, which wouldn’t be available to an entrepreneur or a business through traditional means. Regular bank loans, for instance, require the person to have a good enough credit score or collateral, but micro-financing doesn’t require this. Therefore, if your small business won’t qualify for a bank loan, it might still be able to attract a micro loan.

The concept became popular as it was offered as a solution to help impoverished borrowers in underdeveloped countries. The countries lacked traditional financial institutions, with the borrowers generally also being unable to loan from the existing institutions due to their low credit history. The loans quickly became a popular option for entrepreneurs and according to the IMF, they’ve been successful in promoting economic growth. It’s no wonder then to find micro-lenders establishing in the developed countries as well.

Benefits Of Micro-Borrowing

There are three special upsides for micro-borrowing, especially when compared to traditional bank loans and credit cards. First, the micro-financing system tends to be much better in terms of the vetting process. Lenders of these loans truly want to get to know you as a business owner. This gives you an opportunity to create a more personal connection with the lender and explain your business vision in detail. Having this personal connection ensures you’re both more engaged in the process – you’ll be more motivated to pay it back, while the lender will want to help you as much as possible.

The loans are always done in a group setting, which means you’ll enjoy the benefit of group support. You’ll have the backing of other small business owners, which is a great advantage for new businesses. The shared responsibility for the loans means everyone has an interest in holding each other accountable and providing support.

Finally, a major benefit for micro-financing is the reduced risk. Since you are only borrowing a small sum to get your business up and running, you aren’t taking a huge risk. When you opt for a bigger loan, you can end up spending more rather than finding clever ways to grow. Small loans will guarantee you take small steps towards your objectives. Since you don’t have endless amounts of money at hand, you’ll want to find thrifty ways to spend the little you have. OZCodes recommends using coupon codes as part of your business spending to find extra savings, while QuickBooks recommends enhancing your understanding of the financial-legal part of doing business.

Things To Keep In Mind

Micro-financing might not be for everyone. You need to remember that the available capital can be quite small and might not be sufficient to cover your actual business needs. Aside from the limits on the available sums, the interest can be higher than with a traditional loan. Therefore, you must be aware of the amount you would need to finance your business projects before applying for the loan.

How To Find Micro-Financing?

There are now plenty of options to find micro-financing. You have options ranging from specialist providers like Many Rivers and NAB to financial service providers such as PayPal. PayPal began providing the loans in the US in 2013 and it has since borrowed over US$1 billion to small businesses. The company also offers the service in the UK and Australia.

If you are looking to finance your small business, micro-financing can be a viable option to consider. You should check out the sources mentioned above and discuss your options with a few micro-lenders. If you aren’t looking for a big initial investment, the option can help you start the business without taking a huge risk.

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