Micro loan and microcredit: what is the difference?
Posted On June 5, 2019
When your business requires funds, you will probably look for a traditional lender, such as a bank, or an online lender. If your need for cash is not very high, you can opt for a micro loan: a loan generally for a sum of less than $ 50,000.
However, during the process of searching for a loan, you can also find the terms “microfinance”, “micro loans” and “microcredit”. What exactly do these words mean? Is there a difference between them?
What type of loan is most appropriate for your small business?
Financial jargon can be confusing. But it is important to understand the meaning of these terms. Selecting the wrong financial product may cause you to pay a higher interest rate than necessary. It can even cause additional charges that do not give your company any real benefits.
Let’s analyze each of these terms and see what type of loan might be the most suitable for your small business. A micro loan is similar to a small business loan in virtually all aspects. The only significant difference is that micro loans involve smaller amounts. Take the example of the United States Small Business Administration (SBA), a government agency that helps entrepreneurs and entrepreneurs, which has a micro-loan program. The maximum amount for each micro loan is set at $ 50,000. However, small businesses often borrow smaller amounts. The average micro loan size of the SBA is only $ 13,000.
On the other hand, the financing we grant in Pabanelas Financial is as follows: our small business loans are available for amounts of up to $ 400,000. The micro loans we offer have a maximum amount of $ 75,000.
Features of a Pabanelas Financial Micro Loan
|Annual interest rates: 19% to 34%
|Loan repayment period: 18 to 24 months
|Payment frequency: monthly
|Maximum loan amount: $ 75,000
|Opening commission: 6.99%
|Early payment penalty: None
|Who can apply
|Your business must have been existing for at least 9 months.
|Your gross annual sales must be at least $ 30,000.
|You must have a social security number (SSN) or a tax identification number (ITIN).
|Applicants without a credit history are eligible to apply.
|Collateral not required.
If your business needs cash, applying for a micro loan is a great idea. A micro loan from Pabanelas Financial is one of the best ways to raise funds for your business.
Micro loans are superior financial products compared to other methods such as a line of credit or a payday loan.
The term microfinance could be the word that encompasses several financial options for small business owners who need small amounts of money (just like micro loans).
However, the term actually refers to different financial products offered to poor people. The assistance can be in the form of:
- A small loan
- A system that helps an individual save some money regularly
- A specific type of micro-insurance
It is quite evident that microfinance is not the right financial product for a small business owner.
A publication entitled 5 Truths about microfinance at Wharton School points out that extreme poverty can be reduced by promoting entrepreneurship. The Wharton School document states that microfinance can provide small sums of money that poor people need to establish or expand their businesses.
A microcredit involves lending small amounts of money to poor borrowers, usually in poor countries. It is a type of microfinance.
The microcredit began to become popular when Muhammad Yunus established the Graceline Bank in Bangladesh, which is one of the poorest countries in the world. The Graceline Bank lent small sums of money (ranging from $ 27 to $ 500) to poor people so they could start a small business and be economically independent.
In recognition of the work he had done in the area of lending money to impoverished people, Muhammad Yunus received the Nobel Peace Prize in 2006.
In recent years, the total number of microcredit borrowers has grown exponentially. Here is a chart illustrating the increase from 1997 to 2013. Another important thing about microcredits is that your interest rates can be high. However, since the loan amount is so low, the monthly installments are usually affordable.
How much money are mycredits usually? The microfinance model, which began in the developing countries of Asia, Africa and Latin America, lends between $ 200 and $ 300 (although there are places where they can be higher or lower figures). These sums can make a big difference in the lives of people living in low-income countries.
Remember that microcredit is not aimed at small businesses that require a loan to grow, but is essentially a method to combat poverty.
Micro loans and micro loans: the main differences
Micro loans and micro loans are very different financial products. The following table shows how different they are:
|Who is it for?
||It allows small business owners to raise money for their businesses.
||Economically disadvantaged people get the funds to start or grow their business.
|What can it be used for?
||Buy equipment, buy inventory, pay salaries and other expenses related to the business.
||Start a new business or invest additional funds in an existing company.
||Up to $ 50,000. Pabanelas Financial offers a higher microcredit limit of $ 75,000.
||A few hundred dollars or a few thousand at most. For example, Graceline Bank America offers a maximum loan of $ 2,000.
Microcredit programs may also carry additional conditions. Graceline Bank requires borrowers to form groups of five and receive financial training for several days. The group has to meet every week to make payments and receive additional training.
Does your company need a micro loan?
If you own a small business and need funds, consider applying for a micro loan from Pabanelas Financial. You will know instantly if you prequalify and it is possible to receive money in your bank account within two or four days after the loan application.
Our motto “We do not close the doors to any business” ensures that your loan application has a good chance of being approved.