Microfinance, sometimes known as microcredit, is a method of providing capital to SMEs and entrepreneurs. Small and individual enterprises frequently lack access to conventional economic means from large entities. This makes it more difficult for them to obtain loans, insurance, and investments to help their firm develop. Microfinance is basically the provision of loans, credit, access to savings accounts, and even insurance plans and money transfers to small business owners and start-ups. In the developing modern age, there are numerous such businesses.
Microfinance has been exclusively responsible for catapulting many small enterprises to the next level of enhanced productivity and turnover. The following are some ways in which microfinance banks might assist in funding SMEs:
1. Facilitating Access to Financial Sources –
Microfinance organizations provide main credit and lending facilities for SMEs who are unable to obtain small loans from the organized financial sectors. Furthermore, the majority of these organizations offer microloans and other financial services with low-interest rates simplified procedures, and minimal documentation. In this case, the financial performance of SMEs, among other things, is determined by the ease with which they can obtain loans from microfinance institutions, indicating a symbiotic relationship.
2. Enacting Inclusive Policies –
To carry out ordinary operations, SMEs frequently use unskilled and semi-skilled laborers, many of whom are economically disadvantaged and marginalized. Microfinance lenders jointly target these people's ambitions, adopting business models intended at alleviating poverty and raising their standard of life.
3. Assisting with Business Expansion –
The most important purpose of microfinancers is to provide SMEs with a roadmap for expansion strategy and aid in expanding their operational footprint outside conventional strongholds. This is generally accomplished through assisting SMEs in expanding the number of stores, expanding into more unexplored business areas, and finally becoming serious market competitors.
Furthermore, microfinancing houses can provide loans to a group of people who share common ambitions and interests. What happens, in this case, is that if one of the participants fails to return on time, the portion is normally distributed and borne by other group members.
Microfinancers typically find it comparatively simpler to retrieve their loans in this manner, which leads them to lend more, allowing SMEs to utilize the funds, enhance production, and profits in the process.
4. Microfinance Institutions Have a Higher Level of Credibility –
You may blame it on the cooperative approach of microfinance, but SMEs tend to trust microfinance firms more. Another cause for this could be bespoke financial products that are tailored to the specific needs of SMEs and the nature of their operations.
5. Financial Intelligence –
Those who obtain microloans may be compelled to attend training sessions. Bookkeeping, cash flow management, and other important skills are covered in these courses. Access to cell phones and wireless internet all across the world has further aided the spread of microfinance, as potential creditors can use their cell phones as banking channels.
Without a question, developing nations have embraced the notion of microfinance loans and microfinance banks, it is no wonder that these micro-lending houses have become the lifeline of SMEs based in these countries. Many underprivileged groups of the population have been able to mix with the mainstream due to microloans.