There are various business funding options available, which include Non-Banking Financial Corporation (NBFCs), banks, schemes by the government, and equity & crowd funding. Among the various options available to you, choosing the right tool to fund your business is a tough task.
To choose the appropriate one for your business it is important to know several things. You need to analyse your business, check for your business requirements and your capacity to repay the loan. After doing all these it might b Owing to its ease and affordability, e possible that you apply for a business loan and your loans get rejected. There can be several reasons for this, but one of the reasons behind several rejections is- the venture for which you applied for the loan, is not eligible to qualify for the loan.
There are the businesses which are on small scale and lenders are not ready to lend to such ventures. Micro loans are the best option for such ventures when you are looking for funding. However, it’s very important to determine the best-suited loan for your business and for that is equally important to know the pros and cons of both business loans and microloans before availing one. There are other differences as well which one need to consider while choosing between a business loan and a Micro Loan.
What are Micro Loans?
Micro loans are small amount loans that are normally offered by an organization, these can be a community-based non-profit organization or it can simply organizations whose aim is to encourage small entrepreneurs. Microloans have been created to help the small scale industries who cannot qualify for conventional business loans as it requires lots of paperwork, proofs, and collateral. 70% of the business in India is small & medium scale enterprises and Microloans has played a major role in their success.
Differences Between Business Loans & Micro Loans
One of the main differences between a Business loan and a microloan is based on the loan amount that can be approved through them.
Through microloans small amount of loan can be borrowed, this can be up to ₹1 lakh, whereas through a business loan borrowing a small loan amount as well as borrowing a large amount both are possible.
Depending upon the requirement of your business you can avail business loans of up to ₹30 lakhs to ₹50 lakhs can be availed from banks & NBFC. However when the requirement is for the small loan amount, one should go with microloans as they are easily approved as compared with the business loans.
Interest rate is yet another key difference which discriminates a microloan and a business loan. Microloans usually have a higher rate of interest than conventional business loans.
This is because microloans are considered to be for short-term while conventional business loans are considered to be for long-term. Higher rate of interest enables the microloan lender to earn a profit in a short time. Since some of the microloan lenders are non-profit organizations, they raise funds for the organization through the profit earned. Generally, for microloan interest rates range from 8% to 16% while for the conventional business loan interest rates range from 7% to 9%.
End Use of Funds
Another difference between the microloans and the business loans is based on the end use of funds.
Banks and NBFCs allow the business owners to use the funds borrowed to be used for any purpose related to the business. This includes paying off the business-related debts, purchasing equipment, inventories, paying staff and so on. However, in case of microloan lenders are not allowed to clear their business debts with the funds borrowed through microloans. The funds can be used for specific business operation needs such as for paying the rent, salaries, equipment purchases, and supply purchases. Using the funds for clearing previous business debt is not allowed.
Microloans and conventional business loans can also be differentiated based on the tenure period.
As mentioned above we already told you that microloans have a high-interest rate, but another important thing to be noted here is- it is for short term only. The maximum duration for which a microloan can be availed varies from one year to a maximum of two years. On the other hand, the interest rate charged against the conventional business loan is lower as compared to a microloan but on the same hand, the tenure for which a business loan can be availed is more. Generally, the maximum tenure period for a business loan varies from 5 to 10 years, depending upon the lender.