Difference Between Microcredit And Microfinance And Microloan: Which One Do You Need?
Understanding the difference between microcredit, and microfinance, and microloans is crucial if you’re in need of financial assistance.
What exactly do these words mean?
Is there any difference between them?
Which type of loan is the most appropriate for your needs?
Financial jargon can be confusing. But it’s important to understand the meaning of all these words to get the product that matches your needs.
Let’s analyze each of these terms and see which form of borrowing could be best suited for your small business.Do you need a microloan?
What Is A Microloan? Financing For A Small Business
Microloans are a financial product typically given to entrepreneurs and small business owners. Usually, applicants have difficulty qualifying for traditional bank loans. These products are often used to finance smaller businesses or to help with working capital or inventory.
They are typically made by community development financial institutions (CDFI lenders).
Microloans can be a valuable tool for entrepreneurs who cannot get traditional bank loans. They can also help business owners with working capital or inventory needs.
If your business requires funds, applying for a microloan program is a great idea.
Microloans are far superior to other methods like a line of credit or a high-cost payday loan.
How Much Do Microcredits Offer?
As their name suggests, they offer smaller amounts of cash compared to more traditional business loans. They’re usually for sums below $50,000. They’re kind of a mix of personal loans and small business loans.
The average microloan in the United States is about $13,000.
If your business requires funds, you can turn to a traditional source like an online lender that advances money to small companies.
At Camino Financial, we specialize in helping underbanked businesses in overseen communities.
Features Of A Camino Financial Microloan
These are our loan terms:
- Loan amount: $5,100 to $35,000
- Loan payback period:24 to 36 months
- Payment frequency: Monthly
- Annual interest rates: 31.55% to 54.90%
- Origination fee: 6.99% of the loan amount
- Early payment penalty: None
- Your business should be active and registered for at least 9 months
- Your gross annual sales should be at least $30,000
- The loan applicant must have a social security number (SSN) OR a tax identification number (ITIN)
- Applicants without a previous credit history can apply
- No collateral required
Learn how to get a loan without credit
Plus, our loan application process is completely online. You can complete it anytime, anywhere. There’s no paperwok.
What Is Microfinancing? Financial Services In Developing Countries
The term microfinance refers to different financial products provided to unemployed or poverty-stricken people. Usually, you could find them in emerging countries.
Microfinancing assistance can come 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 clear that microfinance isn’t the right financial product for a small business owner in the US.
Why Does Microfinancing Exist?
“5 Truths about Microfinance” from the Wharton School points out that promoting entrepreneurship can reduce extreme poverty.
These low-income groups are usually ignored by the formal financial sector and, as such, don’t have many other funding options. As a result, many end up in debt with loan sharks that charge very high-interest rates.
Don’t confuse interest rates and APR.
Microfinance and microcredit offer a cost-effective alternative that leads to growth, not debt.
What Are MFIs?
Microfinance institutions (MFIs) are financial service providers that offer microbanking services to low-income individuals or households. They typically provide small loans and savings products to help their clients:
- start or expand businesses
- buy homes
- send children to school
- access other basic needs
MFIs can be regulated by governments or international organizations.
What Is A Microcredit? A Financial Product For Low-Income Individuals
Microcredits are a form of microfinancing. Usually, they’re short term business loans.
They involve lending tiny amounts of money to borrowers below the poverty line, usually in poor countries. This cash helps poor people set up or expand their businesses.
The rate of interest that borrowers pay could be high because they tend to have a bad credit history. That said, the monthly installments tend to be quite affordable because the loan amount is low.
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.
How Much Do Microcredits Offer?
The microfinance model envisages advancing from $200 to $300, although there are places where they could be lower and higher. These sums can make a massive difference in the lives of people who live in low-income countries. It became popular in Asia, Africa, and Latin America.
Remember that microcredit isn’t aimed at small companies that need a loan to grow. Instead, it is essentially a method to alleviate poverty and boost the country’s economy.
How Can Micro Credits Help The Poor?
Microcredit can ease extreme poverty. How? It provides small loans with various benefits and optimal terms and conditions. Microcredit aims to empower borrowers by helping them start and operate a business and generate income.
The Grameen Model Of Microfinance Services
The Grameen model postulates that credit should be accessible to everyone. Regardless of income or assets.
It gained widespread publicity in Bangladesh, one of the world’s poorest countries. Muhammad Yunus established the Grameen Bank, that advanced small sums to poor people. These sums ranged from $27 to $500 and had the goal of helping people start a small business and become economically independent.
Muhammad Yunus’ work in the area of lending to impoverished individuals didn’t go unnoticed. He received the Nobel Peace Prize in 2006.
The model was so successful that over 95% of microcredits offered by the Grameen Bank were repaid on time. This high repayment rate has helped make microfinance a sustainable business model. Thus, many have replicated the Grameen model in many countries.
Microloan programs may carry other conditions, as well. For example, Grameen Bank requires borrowers to form groups of five and undergo financial training for several days. Then, the group has to meet weekly with field officers to make repayments and receive training.
Microloans vs. Microcredit vs. Microfinance: Main Differences
Here is a table showing the difference between microcredit, and microfinance, and microloans.
|What is it?||It’s a commercial lending product that offers small amounts of cash.|
It is a small loan facility provided at a low-interest rate to entrepreneurs below the poverty line to help them start their businesses.
|An array of financial services targeted at low-income individuals in developing nations.|
|Who is it intended for?||Small entrepreneurs. Like mom-and-pop business owners.||Economically disadvantaged people get the funds to start or grow their businesses.||For people living in poverty and lacking access to traditional banking services.|
|Uses||Purchasing equipment or inventory, debt consolidation, paying wages, and other business-related expenses.||Starting a new business or investing extra funds into an existing venture.||Microfinance is a broader concept. It includes loans, insurance, savings, pension, etc., aimed at low-income people. In other words, it includes credit as well as noncredit activities.|
(Microcredit is part of microfinance.)
|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.|
It’s important that you understand the pros and cons of microloans or any other lending products you apply for.
Does Your Business Need Financial Assistance?
As you now know, microfinance encompasses several financial services (including microcredits). These products are for low-income individuals, and they usually exist in developing countries.
In the United States, it’s very hard to find microfinancing because it’s a developed country with a strong economy. So if you’re looking for a microcredit, chances are you’re actually looking for a microloan.
If you apply for a Camino Financial microloan, you’ll know instantly if you prequalify. Plus, it’s possible to receive money in your bank account within two to ten days.Apply now!
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