Finding the right financing instrument for the company is a tedious task. There are many corporate finance options, including Non-Banking Financial Firms (NBFC), traditional banks, government systems, and equity financing.
Because of its convenience and affordability, business loans are the preferred choice for business people. Understanding how a business can be funded is one of the biggest challenges entrepreneurs and business owners face. For the most part, choosing the best business loan requires proper planning. The financial sector, which consists of banking and non-banks, serves the economic needs of business actors through business loans and microloans. However, it is important to identify the most suitable loan for your business and study the pros and cons of business loans and microcredit before you take advantage of them.
Regular Loans or Microloans
A traditional or regular business loan consists of financing obtained from a financial institution such as a bank or credit union. The requirements for obtaining a traditional business loan from a bank are determined by each bank. For example, when applying for a traditional business loan, certain documents are required and creditworthiness is very important. Although the funds will be used for business purposes, the requirements are stricter than ever. This is largely due to the great recession. Therefore, most banks require a personal guarantee from the person applying for the business loan.
Microloans are small loans that are usually administered by an organization, usually a community-level non-profit organization. The concept of microcredit was first developed in 1974 by Mohammad Yunus at Grameen Bank. Microcredit is designed to help the poor who cannot obtain conventional credit for their business. The SBA also has a microcredit program that uses lending intermediaries. These intermediary lenders are community-based non-governmental organizations.
One of the main differences between a business loan and a microloan is the number of credits that can be approved through it. Microloans are usually small loan amounts up to Rs. 1 lakh while business loans can range from small short-term loans to large long-term loans.
Business loans of up to Rs 30 to Rs 50 Lakhs are available from banks and NBFC, depending on your company’s needs. However, if the amount of credit needed is small, then microloans must be used because it is easier to approve than business credit.
Rate of Interest
Another difference is the interest rate. Microloans usually have a higher interest rate than traditional business loans. One reason is that microcredit is considered short-term loans, while a regular business loan is considered long-term credit. Higher interest rates allow micro-lenders to win and to earn a profit. Since most microcredit lenders are not looking for profit, they should be able to raise funds for the organization in this way. Another reason for higher microloan interest rates is the fact that microloan guidelines are not as strict as they apply to traditional business loans that is why the traditional business loans are considered affordable and business-friendly to all business owners.
Microloan has a high-interest rate, but another important point is that creditors of non-profit microcredit organizations only need to raise funds for the organization in a short time. This means that companies must generate sufficient capital to pay off loans in a short time if they choose microloan. The maximum duration of use of a microloan varies from one year to a maximum of two years. Traditional business loan interest rates are lower than micro-loans, on the other hand, the business loan mandate can be used longer. In general, the duration of a business loan varies and depends on the lender.
The Use of Funds
Banks and NBFC allow business owners to use loan funds for business purposes. Some financial institutions may allow companies to use funds for business purposes, including paying off other business-related debts. This includes paying back business debts, purchasing equipment, supplies, paying employees, etc. However, in the case of microloans, lenders are not allowed to use funds borrowed from microloans to meet their business debts. The funds can be used for specific business needs, for business operations like payment of rent, salary, purchase of equipment, and purchase of supplies. The use of funds to pay back business debts was not previously permitted.
Mudra Loan: An Opportunity for Business Sectors
MUDRA is NBFC and supports the development of the micro business sector in the country. MUDRA supports bank / LKM / NBFC refinancing of loans to micro-units with credit terms of up to 10 lakhs. MUDRA supports the refinancing of small businesses as part of the Pradhan Mantri MUDRA Yojana program. Here the loan issued is given without any collaterals. Mudra loan is extended for a variety of purposes which provide income generation and employment creation. The loans are extended mainly for a business loan for vendors, shopkeepers, and other service activities, Working Capital Loan through Mudra Cards, and also to transport vehicle loans.