Cafeteria worker posing in cafe. Concept: microloan vs microcredit
By: rkapur
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Microloan vs. Microcredit: What’s The Difference?

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When your business requires funds, you’ll probably turn to a traditional source like a bank or to one of the new online lenders that advance money to small firms. If your cash requirement isn’t very high, you may decide to opt for a microloan. That’s another name for a small loan, one that is usually for a sum below $50,000.

However, during the process of searching for a loan, you may also come across the terms “microfinance”, “microlending” and “microcredit.”

What exactly do these words mean?

Is there any difference between them?

Which type of loan is the most appropriate for your business?

Financial jargon can be confusing. But it’s important to understand the meaning of these terms. Selecting the wrong financial product can lead to paying a higher interest rate than is necessary. You may even incur additional charges that don’t provide your business with any real benefit.

Let’s analyze each of these terms and see which form of borrowing could be best suited for your small business.

Microloans

A microloan is similar to a small business loan in practically every respect. The only significant difference is that microloans imply smaller amounts.

To understand this point, let’s take the example of the United States Small Business Administration (SBA), a government agency that helps business owners and entrepreneurs, that has a microloan program. The maximum amount for each microloan is set at $50,000. However, small firms typically borrow lower amounts. The SBA’s average microloan size is only $13,000.

The loans that we extend to entrepreneurs at Camino Financial are as follows: our small business loans are available for sums up to $400,000. The microloans that we offer have a maximum amount of $75,000.

Features of a Camino Financial Microloan

Loan terms
Annual interest rates: 19% to 34%
Loan payback period: 18 to 24 months
Payment frequency: Monthly
Maximum loan amount: $75,000
Origination fee: 6.99% of the loan amount
Early payment penalty: None
Who’s eligible
You should have been in business for at least 9 months
Your gross annual sales should be at least $30,000
The loan applicant must have a social security number OR a tax identification number (ITIN)
Applicants without a credit history are eligible to apply
No collateral required

If your business requires funds, applying for a microloan is a great idea.

A microloan from Camino Financial is one of the best ways to raise funds for your business.

Microloans are far superior when compared to other methods like a line of credit or a high-cost payday loan.

Microfinancing

The term microfinance could be the word that encompasses several financing options for small business owners that need smaller sums of money (just like microloans.)

But the term refers to different financial products that are provided to people who are unemployed or poor. The assistance could be in the form of:

  • A small loan
  • A system by which an individual could save some money regularly
  • A specific type of micro-insurance

It’s quite apparent that microfinance isn’t the right financial product for a small business owner.

A publication titled 5 Truths about Microfinance from the Wharton School points out that extreme poverty can be reduced by promoting entrepreneurship. The Wharton School document states that microfinance can provide small sums of money that poor people need to set up or expand their businesses.

Flat design icons concept set of financial security crediting and management vector illustration. Concept:

Microcredit

Microcredit involves lending tiny amounts of money to poor borrowers, usually in poor countries. Microcredits are a form of microfinancing.

Microcredit gained widespread publicity when Muhammad Yunus established the Grameen Bank in Bangladesh, one of the world’s poorest countries. The Grameen Bank advanced small sums that ranged from $27 to $500 to poor people so that they could start a small business and become economically independent.

In recognition of the pioneering work that he had done in the area of lending money to impoverished individuals, Muhammad Yunus was awarded the Nobel Peace Prize in 2006.

Over the last few years, the total number of microcredit borrowers has grown exponentially. Here’s a chart that illustrates the increase from 1997 to 2013.

Microcredit borrowers line chart. Concept: microcredit vs microloan.Source Vox

Source: Vox

Another important fact about microcredit is that the rate of interest that borrowers pay may be high. However, since the loan amount is low, the monthly installments could be affordable.

What are the amounts that we are talking about here? The microfinance model, which got its start in the developing countries of Asia, Africa, and Latin America, envisages advancing $200 to $300, although there are places where they could be both lower and higher. These sums can make a massive difference in the lives of people who live in low-income countries.

Remember that microcredit isn’t aimed at small companies that require a loan to grow. Instead, it is essentially a method to alleviate poverty.

Microloans vs. microcredit: main differences

Microloans and microcredit are two distinct financial products. The following table shows how different they are:

 💰 Microloans Microcredit
Who is it intended for? Allows small business owners to raise money for their firms. Economically disadvantaged people get the funds to start or grow their business.
What can it be used for? Purchasing equipment, buying inventory, paying wages, and other business-related expenses. Starting a new business or investing additional funds into an existing venture.
Loan amount Up to $50,000. Camino Financial offers a higher microloan limit of $75,000. A few hundred dollars or a few thousand at the most. For example, Grameen Bank America offers a maximum loan of $2,000.

Microloan programs may carry additional conditions, as well. Grameen Bank requires borrowers to form groups of five and undergo financial training for several days. The group has to meet every week with field officers to make repayments and receive additional training.

Does your business need a microloan?

If you’re a small business owner who has been in business for nine months or more, and you require funds, consider applying for a Camino Financial microloan. You’ll know instantly if you prequalify and it’s possible to receive money in your bank account within two to four days of making the loan application.

Our motto “No business left behind” ensures that your loan application has a good chance of being approved.

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