Did you know that the average rejection rate for credit card applications rose by 20.9% in 2021?
When people apply for a loan, they typically require funds they don’t already have. Most people’s first choice is to visit their bank and find out what options are available. Banks and credit unions are traditional ways of borrowing money but don’t offer various options. Borrowers then seek out alternative options, such as microfinancing or microloans.
Small businesses have a hard time receiving financial assistance from traditional lenders. Banks require high credit scores, substantial documentation, and well-established credit history, which many small businesses may not have. Microfinancing is available to help and provide capital to companies like these.
What Is Microfinancing?
Microfinancing is capital lent to borrowers who cannot obtain funds from elsewhere. It is also known as microcredit. Small businesses usually require these funds, which they cannot receive from traditional lenders.
Small businesses are still establishing themselves and working their way up in their respective industries. They lack capital and don’t have access to additional resources that are usually available through traditional lenders. Most banks refuse to offer loans or insurance to small businesses, which are essential for growth.
Microfinancing then comes into play and takes place between an investor and borrower. It’s a solution offered to low-income businesses. Investors provide capital in different forms like microloans, savings accounts (micro savings), and insurance policies (microinsurance).
These loans are available through non-profit organizations called microlenders. Multiple options are available when finding the right lender. These organizations/investors require minimal documentation and usually accept borrowers struggling to get financial help from traditional lenders.
Why Is Microfinancing Important?
Microfinancing is essential because it provides the underprivileged with an opportunity to grow and benefit from additional capital, helping their business ideas and aspirations to become a reality. These borrowers usually face rejection when applying for everyday needs such as chequing accounts, lines of credit, and loans.
Microfinancing prevents small business owners from resorting to risky loans or payday advances with extremely high-interest rates. Rejection can force some small business owners to borrow money from friends and family or face the sad reality of losing their business. With microfinancing, small business owners can get the funding, invest in their companies and reap the benefits of a loan.
The Benefits of Microfinancing
Both borrowers and lenders benefit from microfinancing. Microloans can be a form of passive income for those looking to invest their money. Diversified investments in microloans allow investors to earn big profits.
For the borrower, a gate of opportunities opens when they choose micro-financing. Microloans originally began to help poor people invest in a venture that could help them earn more money and sustain a living. This method has proven successful, to the point that from 1997 to 2013, the number of borrowers reached 211 million worldwide.
With the help of money borrowing apps, small businesses have the potential to benefit from microfinancing in many ways.
Helps With Growth
An endless number of choices are available to borrowers through microfinancing. Your small business can grow and finally reach heights of success with the help of additional capital. These funds can help you pay for inventory, office supplies, furniture, equipment, tools, or renovations. All these requirements contribute to your business’s growth, helping you expand your operations and become competitive.
Build Your Credit History
There’s not much you can do about your credit when traditional lenders refuse to loan capital to your small business. If you’ve got minimal credit history or a low credit score, you also need the opportunity to build it. With microfinancing, you have the chance to prove yourself and boost your credit by responsibly paying your loan on time each time.
You can build your credit score and improve your chances of future credit approvals by consistently making timely payments. It ultimately will help you prepare for a traditional loan where you can borrow more significant amounts of money from a bank.
Guidance and Referrals
Some lenders will offer additional services to borrowers when microfinancing. These organizations will help you achieve success at a faster rate by providing you with a plan. It can include guidance in drafting a successful strategy, referrals to other organizations, or advice on financial literacy.
Learn To Manage Your Finances
When given the responsibility of a loan, you learn to balance your finances. Consequences such as a bad credit score or bankruptcy motivate borrowers to manage their money responsibly. Analyzing your income and expenses helps you budget well. It enables you to understand the value of budgeting and making your payments on time which can positively affect your credit.
As a borrower, take this opportunity to become financially responsible. Make your payments on time, focus on your debt-to-income ratio and invest the funds where necessary.
How To Get a Microloan
You can begin by looking for trusted peer-to-peer lending apps to get started. There’s a wide variety of lenders to choose from, or you can explore help from a non-profit organization willing to lend money to you. Here are a few steps to help get approved for microloans.
Write a Business Plan
Lenders want to see that you’re passionate about your business. Sharing a well-thought business plan will help them notice why you need the loan and where you’ll use it. Lenders are willing to help businesses that have the potential for success.
A thriving business plan includes a company overview, introduction, mission statement, market and industry analysis, marketing plan, and operations plan. When you can demonstrate how the microloan can help your business and how it can benefit you, lenders will be more willing to lend you money.
Maintain Good Credit
Having good credit can only do you good. Although you may not have good credit right now, you can work towards it and create a good impression when applying for a loan. The good thing about microloans is that you can build your score as payments get reported to the credit bureaus. You can take additional steps, such as checking your credit report to ensure there aren’t any errors. If there are, you can file a dispute and get them fixed.
Give Collateral or Guarantee
Since most microlenders do not require collateral, it helps your approval process. Generally, traditional lenders demand collateral with the loans, such as your home, car, or other equipment for security.
Microlenders can tweak the rules when it comes to giving out a loan. So if you’ve got a unique situation or difficult circumstances, you have a chance of convincing the lender to approve. Though, you can offer a guarantee through legal documentation to reassure the repayment of your loan.
Choose the Right Lender
Each organization has its way of approving loans. By choosing the right lender, you can avoid complex application processes, incredibly high-interest rates, and the chances of facing rejection.
A peer-to-peer lending platform like Lendee is available to help investors and borrowers easily make transactions.
Lenders can invest in microloans and choose who they want to help with money. Borrowers can quickly request an amount with this instant money borrowing app. Lendee then gives the borrower access to a vast network of lenders who’ll be willing to help them.