Distinguish between business loan and micro loan

business loan vs micro loan

The difference between a business loan and micro loan lies in the scope of the two. Any micro finance is an individualistic outlook to provide financial services to the less privileged or new business startups who do not have the capacity to approach mainstream sources. On the other hand, micro finance talks about an ecosystem or social structure on the whole.

How to deal business funds?

There are several business funding sources available for the new ventures, including NBFCs (Non-Banking Financial Corporation), Government aided bank schemes, equity options and crowd funding. Out of all the available options, it is difficult to choose the best funding option for your business.

To arrive at the best business funding option, it is important to know a few things. To begin, you need to inspect and scrutinize your business needs, and the repayment capabilities of the borrower. It’s possible to have a business loan online and get rejected, owing to the ease and affordability. There can be handful reasons for such a rejection. One of the prime ones being that your venture does not qualify for a personal loan.

What factors disqualify your venture?

If your business is just starting out, then your small scale could be considered as a disqualification. Micro loans can form to be the best option for small ventures when funding is a major issue. So, it’s extremely important to choose the best loan alternative for your business and is equally important to understand the strengths and weaknesses of business loans and microloans before opting. Although, there are many other significant differences in choosing between a loan and micro loan.

What are Micro Loans?

Micro loans are small value loans offered by a community, or an NGO or corporations which typically support small businesses. Micro loans are created to encourage small industries who cannot have loans from conventional sources. Importantly, these businesses cannot meet the complicated clauses. The financial ecosystem has been accepting of the small industries to create a fresh lease.

As per a recent report, 70% of the businesses in India are small & medium scale industries and microloans encourage them tremendously.

Major Differences Between Business Loans & Micro Loans

Loan Amount

The loan amount that can be approved is one of the major differences between a business loan and a microloan. The amount to be sanctioned under microloans is limited, mostly up to Rs. 1 lac. However, a business loan provides a larger amount (as per the requirement).  It’s true to say that smaller get easily approved.

Interest Rates

The interest rate is another major difference between a micro loan and business loan. Microloans mostly have a higher rate of interest compared to business loans.

Microloans are usually short term whereas business loans are always long term. Higher rate of interest enables the microloan lender to earn a profit in a short time. Typically, the microloan Generally, the rate of interest on for microloans fall between 8% to 16% while for the business loan interest rates are much lower ranging between 7% to 9%.

End Use of Funds

Financial institutions are allowed to use the loan amount for any purpose related to the business, whether it is any business related debt, business inventory, staff salaries etc. However, microloans can be used only to settle long pending business debts. The funds can be specifically used for doing away with rent, salary, infrastructure, supply, etc.

Microloans and conventional business loans can also be differentiated based on the tenure period.

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