You have probably heard the term micro finance time and again but you never actually thought about it long enough to get its actual meaning.
In fact, the reason why you might have started taking it a bit seriously is that because you want to partake in the benefits and features of a micro financing institution for your business. But what is micro finance really?
Micro finance can simply be described as lending to small time entrepreneurs or businessmen. These people normally don’t have any means of transacting with banks or other financial institutions.
The businesses eligible for this type of financing are small-time vendors, self-employed individuals, and farmers among so many others. Usually, a micro finance is relatively small due to the fact that the expected clientele of the service are also small-sized businesses, ergo there is no need for huge financing terms.
There are at least two main mechanisms for micro finance transactions. One is a relationship-based banking, which is usually offered to individual entrepreneurs and small businesses.
Two is group-based entrepreneurs, which have one leader who will carry out almost all necessary transactions with the micro financing institution. Both mechanics have their own benefits for their target or prospect businessmen or entrepreneurs, although there are also some features that may not benefit the businessmen or micro entrepreneurs.
All types of financing and banking services have their own share of pros and cons, so here are some of the evaluations about micro finance:
Pros of micro finance
1. Enabling small-time businessmen to do bank transactions like deposit, withdraw, or even invest. Micro financing is among the most brilliant ideas banking and financing institutions have ever come up with. This enabled even the smallest of businessmen and traders to save and keep money for the rainy days.
This was not a natural thing for these people to do because they were never given such chance in the past.
Transacting with banks is among the most remote ideas that these people would ever thought of until micro finance. Although they can keep money in their homes, these people know that keeping their money in banks is the safest thing to do.
2. Micro finance can offer lending as well, depending on the savings or collateral of an individual or group of entrepreneurs. Borrowing money is another important benefit of micro financing.
Unlike in the old days when farmers, vendors, and small-time businessmen cannot borrow from banks not because they are financially incapable but just that they lack the necessary documents that will complete the paper works required by banks, micro finance institutions have now come forward for this very purpose.
And because they have, these self-employed businessmen can already improve their craft and lifestyle.
Cons of micro finance
1. Micro finance institutions usually offer low deposit rates. Name a scheme that is perfect for everyone and you’d end up wishful thinking.
Like any other schemes, micro finance is not perfect for everyone. The system requires high overheads and operating expense because personnel should be doing fieldworks, looking for small-time businessmen who need financial and investment help.
Due to that, micro finance institutions are compelled to put out just enough earning interest for their clienteles compared to huge banking and financing institutions. The not so good news is that these interests are usually lower and thus the earnings of these monies are also way, way low.
2. Micro finance offer high loan interest rates. Another not so good thing about micro financing is its bit high interest rates when it comes to loans and other lending features.
This is primarily because the people or businessmen who are going to borrow money are among the high-risk accounts and of course, there is the question of operation expense and additional manpower that would collect their monthly or bimonthly payments.
These additions are the main reasons why a micro financing company offers bigger interest rates compared to those larger banks who deal with low-risk accounts.
3. Micro finance firms don’t have as much features and benefits as a huge banking corporation could offer. The handful benefits and features that a micro financing company offers is usually among its negative sides. First reason is the simple lifestyle of its clientele.
These people have simple needs which are what the micro financing institution is trying to provide them with. There is also the risk of non performing loans in case the institution starts to fail collecting their dues.
You see, very few of these people have the time and means to go out of their places and travel to the bank just for the sake of paying their dues even how much they would want to.
So what these institutions do is just provide them with enough aid that are truly important for their everyday life and business.