Want supplies to start your own small business? A small microfinance loan can help.
Starting your own business can both exciting and rewarding, but the first hurdle is usually to source funding that is affordable. This is where microfinance loans come in - with varying loan amounts, often from $500 to $20,000, these types of loans are provided to borrowers who are considered to be on a low income.
Microfinance programs are often run in partnerships with organisations that can provide training and small business advice. By mentoring and passing on knowledge to these business owners, they then have all the tools and resources they need to give their business the best shot.
How does a small microfinance loan work?
Each microfinance loan is different according to the provider, but they are usually available to help start or support existing businesses with a few employees. This can include both owner-operated businesses, as well as businesses operated from home. Loan amounts can vary from $500 to $20,000 and interest rates (at the time of writing) can be around 5% to 5.99%, usually fixed.
These types of loans are not considered handouts. Borrowers are expected to pay them back and usually do, with a great result. There are not many instances of recipients defaulting on this type of loan, despite the risks. Small microfinance lending is not exclusive to Australia, and shows great result in helping needy individuals all around the globe.
Related information: Have you considered a business credit card to fund your business?
What to compare when dealing with small microfinance loans
There are different types of microfinance loans that are meant to serve various purposes. You have the ability to find the program that is going to be of most benefit to helping you reach your long term goals. Here a few different things that you should keep in mind while exploring this option:
- Exposure. In most cases you will be selling your need or idea in order to attract individuals or businesses into helping you with your cause. You will want to choose an institution that has a high rate of success in exposing stories to the public and garnering the donations needed.
- Multiple opportunities. Look into banking institutions that provide access to a variety of different small microfinance loans. Most major banks work hand in hand with three different non-profit organisations that help individuals in different circumstances.
- Terms. Like with a traditional loan, different microfinance lenders will have different rates, fees and terms that you should explore. Make sure that not only is the program you are looking into suitable to your goal, but that the expectation for repayment is realistic for your circumstance.
Pros and cons
- Interest rates. These types of loans are typically offered with a very low interest rate, encouraging borrowers to be able to pay it back within the specified terms.
- Opportunities. Not only do these types of loans provide you with the funds you need, many of the institutions and organisations involved will also offer assistance with mentoring programs and vocational skills. These are powerful tools that will help you on your road to becoming financially independent.
- Education. Small microfinance loans help to break the cycle of poverty by encouraging the children of poorer families to continue with their education. Evidence shows that children of families who benefit from a small microfinance loan are more likely to stay in the school system than those who don’t use these resources.
- Building support. In many instances, even if approved by the lending institution for a small microfinance loan, you will be dependent on your compelling story to encourage donations to fund it.
What are the risks?
- Default. A small microfinance loan will not only help your initial cause, but it will help your overall lifestyle if you are diligent in paying the money back. These types of loans can be the first building block towards establishing a positive credit scoring that can help you further your financial goals in the future.
- Income. Your income will have to fall under a certain range in order for a lender to consider accepting your application. In some cases you may have to hold a current Centrelink Concession Card or show that your family receives Family Tax Benefit Part A.
- Residence. Depending on the purpose of your loan, you might have to prove that you have been living in the same residence for a specified amount of time.
- Business plan. If you are asking for a loan to fund a small business idea, you might be expected to show a viable business plan for how it is going to be successful. Reputable microfinance loan providers will be able to provide you with the resources necessary to formulate such a plan.
How to apply
You can use the comparison table on this page to see the types of loans that are available to you and the criteria that you must meet in order to qualify. In most cases you will need to meet these requirements to be considered: