Micro-financing in India is the idea of providing financial products and services, such as loans, to small and medium enterprises. Loans such as SME loans are provided to people that do not have access to traditional banking services.
Rural women, low-income households, and small businesses are more prone to challenges and difficulties getting their business off the ground than high-income people. Therefore, micro-financing companies are coming up with financial resources to address these issues. Understanding the needs of small businesses, banks and non-banking financial companies offer loans that ensure maximum benefits.
So, SME financing has been instrumental in assisting small businesses in improving their productivity and maintaining cash flow. Here is how micro-financing helps small businesses in developing communities:
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Easy access to credit facilities
Micro financing is a process of providing loans to low-income individuals with the need for funds to start a business or ensure a smooth running of an existing one. They are available to small and medium enterprises that do not have access to traditional loans.
Also, the processing of applying for SME loans through micro-finance institutions is easy and convenient. Unlike in the old days, borrowers are not required to visit any physical location. One can apply for an SME loan from the comfort of their homes. The best part is that a borrower can secure a loan amount based on their needs and at attractive interest rates. Moreover, there are no closure or prepayment penalties for paying the loan before the due date.
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Help in business expansion
Providing credit in the form of loans is not the only supposed banks and micro-financing institutions offer to small businesses from developing communities. One of the main purposes of micro financing is also to offer a blueprint to micro, small, and medium enterprises. It is to help expand those businesses and their operations beyond the conventional methods. It is worth noting that micro-financing also helps small businesses in increasing the number of outlets and entering uncharted business territories. Through micro-financing, a small business can become a stronger competitor in the market.
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Provide access to education and finance to rural women
It is worth pointing out that micro-financing helps rural women to be financially independent. In India, more than 50% of women in rural areas do not have access to credit. The reason is that they do not have anything to show as collateral nor the education to manage their finances.
So, micro financing institutions are targeting women from rural households to provide them with financial resources. It is to promote women entrepreneurs and encourage women to become business leaders in their communities. Some financial institutions take a step further and provide the required education to improve their financial planning skills and literacy.
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Access to collateral-free loans
Small business owners, especially women in developing communities are less likely to opt for loans to meet their business requirements. The reason is that most traditional loans require collateral. It means that you will have to pledge your property or land to secure loans, such as secured business loans, etc.
However, in the case of SME loans through micro financing, there is no such requirement. Small business owners have access to loans based on their needs without the need to provide their assets with considerable value as collateral. But, lenders do require assurance from borrowers that they will pay the loan amount with interest on time.
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Loans based on specific needs
Every small and medium enterprise has a lifecycle and business requirements. For instance, a small business owner may require funds to buy new stock, purchase equipment, or hire new staff. Whatever the needs, an SME loan can cater to them all. Also, micro-financing institutions offer loans to small businesses based on their needs. For instance, a general store with a requirement of Rs. 200,000/- may not be able to repay the loan through the option of EMI. So, a daily installment loan may best serve a general store.
One can also find small businesses that demonstrate remarkable business transactions and are aiming to grow further. Such small businesses have working capital cycles ranging from 15 days to 2 months. These businesses are generally offered a higher loan amount on monthly equated installments.
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Supports community development
Apart from providing access to easy loans, micro-financing also helps in building communities. For instance, when small business owners and individuals from a marginalised community improve their businesses and income, it leaves a positive impact on the people around them. Having more profits in small businesses means that there will be more money in the communities. They, business owners, will be able to provide for their families and engage more in the local economy.
In short
It is no surprise that micro-financing has been the backbone of small businesses and individuals in developing communities. With the availability of SME loans, businesses have been able to thrive in financially challenging times.
