Every business requires external funding or financial assistance at a stage in its lifetime. Whether it is an equity investment, crowd-funding or loan, each business chooses its ally according to its needs. Such a need for financial assistance arises especially when the business is looking towards expansion or survival. Loans help businesses in both these cases. But loans are also of two types – Business Loans and Microloans. To understand which one to choose for your business, you need to know their difference first.
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What is a Microloan?
Microloans, as the name suggests, are a small amount loans which an organisation offers to a business. The organisations which offer these loans are often community-based-non-profit organisations. These businesses which receive this funding are small businesses which might not qualify for business loans due to lack of collateral, extensive paperwork, financial status, etc. Micro loans are especially helpful for businesses fighting for their survival.
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What is a business loan?
A small to medium-sized business can take a small business loan at the time of need from banks or NBFCs. These loans are easy to apply and often help businesses fund their scaling. The interest rates are reasonable and the lenders are only concerned with your timely payments. However, the business needs to show profitability and the entrepreneur should have a good credit score to qualify for a business loan.
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Why should I choose a business loan instead of a microloan?
When you look towards a loan, the first thing you need to set is your priorities. What are the requirements of your business and what is your capacity to pay the loan? When you have the answers, you can pick the option between the two which fits perfectly to your requirements. However, business in the country is increasingly choosing business loans over microloans. Maybe you should too. Here’s why:
- Loan Amount: A microloan can help you prevent a small hiccup in your business operations. The maximum limit of a microloan that most organisations offer is INR 1 lakh. Now, this may be enough to keep your head above water, but it will certainly not keep you steady. So, a business loan is a better option in terms of the loan amount. Some NBFCs offer you a business loan ranging from INR 30 lakhs to INR 50 lakhs. Such loans can not only help you survive but also boost your growth.
- Interest Rate: Microloans are always offered at a higher interest rate than business loans. Although business loan interest rates are decided by your credit score and the profitability of your business, they are much more cost-effective than a microloan. The factor raising the interest rates is the tenure. Microloans are always for a short tenure. Hence, the higher interest rates allow them to earn huge profits despite it being a short-term loan. Your business loan interest rate will be a maximum of approx. 9% but a microloan interest rate can go up to 16%.
- Usage of the Loan Amount: Business taking a business loan have the freedom to utilise the loan amount as they please. The lender has no right to give directions to the business on how to spend the money. However, in microloans, such is not the case. The micro loan-lending organisation might get involved in the operations of the business if you take a loan from them. The lender may not allow the utilisation of the money any other way than the intended purpose.
The longer tenure and the flexibility which business loans offer, make such loans a popular choice among entrepreneurs.
