Micro Loans - Meaning, Types & How to Apply

Do you require a small loan to develop your business or build working capital? You may find that microfinance loans are the ideal option. Micro Loans are small loans offered by microfinancing companies and other corporate finance organisations. Small enterprises and business owners who might not have access to standard banking services can take advantage of these loans. We will discuss the definition of Micro Loans, the various kinds that are offered, and the application process in this blog.

Purpose of Micro loans

Micro Loans serve various purposes and offer flexible financial assistance to individuals and small businesses. Some purposes of Micro Loans include:

Meeting working capital requirements

Micro Loans are ideal for meeting working capital needs, providing funds to cover short-term operational expenses. Whether purchasing inventory, managing cash flow gaps, or addressing unexpected costs, Micro Loans offer the flexibility to address immediate financial requirements. They help businesses sustain and grow by ensuring the availability of necessary resources when needed.

Maintaining Cash Flow

These loans also play a significant role in maintaining cash flow stability. They act as a financial cushion during slow business periods or when unexpected expenses arise. By bridging cash flow gaps, Micro Loans help businesses meet their financial obligations, keep operations running smoothly, and prevent disruptions that could impact growth and sustainability.

Starting a new business

Micro Loans are a lifeline for aspiring entrepreneurs looking to start their business ventures. These loans provide the much-needed seed capital to turn business ideas into reality. With Micro Loans, individuals can fund initial expenses like equipment, marketing, and setting up infrastructure, giving their new business the necessary financial boost to thrive.

Paying salaries to employees

Micro Loans can be used to ensure timely payment of salaries to employees. These loans provide the necessary funds for small businesses facing temporary financial constraints to meet payroll obligations. By meeting employee salary commitments, companies can maintain a motivated workforce, enhance productivity, and sustain smooth operations.

Consolidating debt

These loans let you consolidate existing debts into a single loan with better terms and interest rates. They allow you to manage debt more efficiently and reduce financial burden. With these loans, businesses can simplify their repayment process and potentially save on interest costs, leading to improved financial management.

Managing day-to-day expenses

These loans are outstanding for managing day-to-day expenses for businesses. They provide financial support to cover daily costs such as rent, utilities, supplies, and inventory purchases. Micro Loans ensure companies have the funds to carry out their operations and effectively meet daily financial obligations.

Eligibility and Documentation for Micro Loan

Eligibility criteria for Micro Loans are usually kept common across all lending institutions. The common eligibility requirements include the following:

• Minimum age of 21 years
• Indian citizenship
• Proof of income and employment stability
• Good credit history

Documentation needed to apply for a Micro Loan includes:

• Identity proof for KYC (Aadhaar card, PAN card, etc.)
• Address proof (electricity bill, rental agreement, etc.)
• Income proof (ITR of 2 previous years, bank statements, pay slips, etc.)
• Business documents

Micro Loan Entities

By offering accessible and customised financial solutions to support small businesses' and entrepreneurs' expansion and success, several Micro Loan organisations play a significant part in empowering small businesses and entrepreneurs.

Here are the major types of Micro Loan financing companies:

Self-employed individuals or professionals

Micro Loan entities provide financial support to self-employed individuals or professionals who need funds to launch or expand their businesses. These loans offer a flexible financing option tailored to the unique needs of individuals working in various sectors.

Sole proprietorships

Micro Loan entities extend their services to sole proprietorships, enabling them to access funds for business operations, working capital, purchasing equipment, and other essential needs. These loans empower sole proprietors to strengthen their businesses and seize growth opportunities.

Small retailers, traders, and manufacturers

Micro Loan entities cater to the financial requirements of small retailers, traders, and manufacturers. These loans help manage inventory, procure supplies, expand product lines, and enhance business capabilities, enabling small businesses to thrive in competitive markets.

Startups

They support startups by providing them with the necessary capital to launch their ventures. These loans offer the much-needed financial boost to cover initial expenses, research and development, marketing, and operational costs, allowing startups to turn their innovative ideas into successful businesses.

Consultants

Micro Loan entities recognise the potential of consultants and offer specialised loan programs to support their professional growth. These loans can be utilised for upgrading skills, acquiring tools and equipment, marketing efforts, and establishing a strong consultancy practice.

Women entrepreneurs

Micro Loan entities prioritise empowering women entrepreneurs by offering them accessible financing options. These loans aim to bridge the gender gap in entrepreneurship, providing women with the necessary funds to start and expand their businesses and fostering economic growth and gender equality.

Unemployed persons

Micro Loan entities support unemployed individuals who aspire to start their businesses. These loans provide them the financial means to pursue entrepreneurial ventures and create self-employment opportunities, helping them overcome unemployment challenges.

Workers with minimum wages

Micro Loan entities recognise the financial struggles of workers earning minimum wages and offer loans to help them meet their personal or business needs. These loans provide a lifeline for individuals in low-income brackets, assisting them in improving their financial situation and livelihoods.

Minorities

Micro Loan entities promote financial inclusion by offering loans to individuals from minority communities. These loans aim to uplift marginalised sections of society, providing them with equal opportunities to start and grow businesses, overcome socio-economic barriers, and achieve financial independence.

Benefits >Benefits & Risk involved in Micro Loansamp; Risk involved in Micro Loans

Key Benefits -

• Accessible Financing: Microfinance loans provide access to financing for individuals and small businesses who may not qualify for traditional loans.
• Business Growth: These loans provide funds for business expansion, working capital needs, and investment in equipment, helping entrepreneurs grow their ventures.
• Flexibility: Borrowers can utilize Micro Loans for various purposes, such as starting a business, purchasing inventory, or improving infrastructure.
• Speedy Approval: Micro Loans often have quicker approval processes than traditional loans, allowing borrowers to access funds promptly.

Risks involved -

• Higher Interest Rates: Micro Loans may have higher interest rates to compensate for the higher risk of lending to small businesses and individuals with limited credit history.
• Limited Loan Amounts: The loan amounts for Micro Loans are usually small, which may not be sufficient for significant business investments or expansion plans.
• Repayment Challenges: Due to the nature of Micro Loans, borrowers may face challenges in meeting repayment obligations, which could lead to financial difficulties or credit issues.
• Dependency on Microfinance Institutions: Reliance on microfinance institutions for financing may limit access to other financial products or services from mainstream lenders.

It's essential for borrowers to carefully evaluate the benefits and risks involved in Micro Loans and consider their financial capacity before making decisions.

How to Apply for Micro Loans?

Looking to apply for Micro Loans from a trusted Corporate Finance company? Here’s how you can do it.

• Research and identify reputable microfinancing companies that offer Micro Loans and have a track record of serving borrowers effectively.
• Review the eligibility requirements, such as minimum age, income criteria, business vintage (if applicable), and required documentation.
• Prepare documentation, including identification proof, address proof, income statements, bank statements, business registration documents (if applicable), and other supporting documents.
• Complete the Micro Loans application form accurately, providing all the required information about yourself or your business.
• Submit the completed application form along with the supporting documents to the microfinance institution.
• Once the application is approved, the microfinance institution will communicate the loan terms, including the loan amount, interest rate, repayment schedule, and disbursement process.

Conclusion

Micro Loans provided by reputable micro financing companies offer a valuable funding source for individuals and businesses. With flexible terms and simplified application processes, Micro Loans serve as a lifeline for those needing quick access to cash credit.

These loans empower self-employed individuals, startups, and women entrepreneurs to meet working capital requirements and expand their businesses. However, it's essential to carefully assess the benefits and risks involved and choose a micro financing company that aligns with your financial goals. Those looking for unsecured Business Loans can apply on the Hero FinCorp website and get quick approval based on their eligibility.

FAQ:

What is the limit of a Micro Loan?

The limit of a Micro Loan may vary depending on the lender and the type of loan entity you are choosing. However, it is approximately Rs 1 lakh.

Is a micro loan a personal loan?

No, a Micro Loan is not the same as a Personal Loan. While Personal Loans can be used for various purposes, Micro Loans specifically target small businesses and entrepreneurs for business-related financing.

How to invest in micro loans?

Investing in Micro Loans can be done through micro loan companies or online platforms that connect lenders with borrowers. Research different options and assess the risk-return profile before investing.

What is the difference between a Bridge Loan and a Micro Loan?

A Bridge Loan meaning interim financing, provides short-term funds for real estate or business transitions, while a Micro Loan offers small-scale financing for individuals and small businesses with limited access to traditional banks.