What is micro-finance and can it be an asset to your company?

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Suddenly, there seems quite a buzz in the business sector about the new set of funding options. It seems that for a small business owner there are several opportunities when it comes to getting funding for their business requirements. Although Venture capitalists are the most talked about funding sources, it is micro-finance that has made funding a lot easier for small business owners.

The non-banking financial companies provide smaller loans. As per the reports these loans are less likely to get into default. The repayment on these loans is in no ways less than the traditional banks.

With the growth of the micro-finance organizations, there has been a rise in the awareness amongst the people about the best practices in the sector. In fact the market leader of the banking industry, Citi has its experts speak about the success of the micro-finance lending.

Micro-finance is on the rise with the banks struggling to keep their business floating after the sub-prime crisis and the recession. Looking at the data pertaining to 2010, the small business loans by the banks have been on the decline at the rate of 13.3% annually.

Why is it that the micro-finance borrowers are more satisfied than their counterparts who have taken small business loans from the banks or have used their credit cards for the small purposes? Let’s look at some of the reasons which can be attributed to this fact:

•   Better relationship: Micro lenders, owing to their size and the loans they have to offer, often get to connecting with the customers on a one-to-one basis. This rarely happens when you deal with the traditional banks. The micro lenders take bigger risks by lending to the start-ups and those who are in the early stages of business yet to make profits. They tend to keep a close contact with the borrowers and support them in the early phases of their business. All this develops a bonding between the two, and this turns down the default rate of these loans.

•   Micro lending works differently than the other loans. The borrowers are interconnected in a web, and each one of them is responsible for the other’s loan in the web.

Micro lending has its own risks but with better communication and interaction with the borrowers this group lending practice has seen a phenomenal growth within a short period.

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