Starting your own business is exciting, but getting down to the nitty-gritty may pose a couple of challenges. For many entrepreneurs, capital is the main initial problem, and that struggle is triple in developing countries.
We see many families fighting poverty, and although they may have the skills to start a small business of their own, having the money to get it off the ground can be extremely difficult.
A business loan is the most probable option. But if the person is underprivileged, it’s unlikely for banks to approve a loan.
.There are tons of requirements and paperwork needed like property documents or some other proof that the person can pay the loan back, and most people who live in poverty don’t have the collateral to get the money they need.
Furthermore, traditional banking options may not always be available in their area.
That’s where microfinancing comes in. Read on to find out what it is, how it works, and the benefits as well.
What is microfinancing?
Simply put, microfinancing is a way for entrepreneurs or small business owners to acquire capital. It’s mainly for individuals or groups who are unemployed or have a low income. As they might not have access to financial resources, it may be hard for them to grow their business through loans, insurance policies, and investments that are usually offered by banks or financial institutions.
For instance, a local street food vendor who wants to build a small restaurant may not even have a savings account, and microfinancing can help him get started with that. Although lending would be the main service of microfinance operations, there are also different products such as microloans, micro-insurance, and micro-savings.
Ultimately, the goal of microfinancing is to help small business owners on their journey towards self-sufficiency and financial freedom. Microfinancing exists around the world, but it’s mainly available in developing countries such as Honduras, Uganda, Serbia, and Indonesia.
How does microfinancing work?
Microfinancing institutions provide support for businesses through giving access to capital, or even just the basics like checking and savings accounts. But before applying for a loan, entrepreneurs must first undergo some educational programs to help them in money management.
Some skills that business owners learn include accounting, bookkeeping, cashflow management, and investing principles. Borrowers get to know how to budget their money, how to manage debts, and even how to understand financing agreements. Once the entrepreneur has finished the necessary classes, they may proceed with loan applications.
Like how traditional banks do it, microfinancing institutions have a loan officer that helps the entrepreneurs throughout the lending process. Microloans can range from $100 to $25,000, and it’s great that people have safe access to this and other additional services that are consistent with ethical lending practices.
So as you can see, instead of focusing on the collateral, microfinancing organizations are more focused on helping individuals succeed.
What are the benefits of microfinancing?
1. Opportunities to the underprivileged. For the financially challenged, getting the resources they need for a business could be extremely difficult. With access to capital and even some tools for financial literacy, individuals and groups could begin investing in their businesses and in themselves too.
2. Women empowerment. There are actually institutions that mainly target women, as many in the underdeveloped countries have less opportunities. But with microfinancing, it would be easier for them to build their own businesses through safe investments. It’s a great way for them to support their families.
3. Overall economic impact. When entrepreneurs are able to create successful businesses, this benefits the economy as well. They’re able to provide employment opportunities for the community and they can also pave the way for increased trading operations in their locale.
What are the types of microfinancing?
As we’ve mentioned, microfinancing generally involves a couple of services or products. Here are the main categories:
1. Microloans. Also known as microcredit, these are small-value loans that are usually less than $100. It may not seem much to people in a developed nation, but this amount could greatly help micro-enterprises such as sewing, basket weaving, delicacy making, and street vending.
2. Micro-insurance. Micro-insurance allows for very small premiums and policy face amounts. Some micro-insurance samples include crop insurance, livestock insurance, natural disaster insurance, and disability insurance. Many people in underdeveloped countries are more exposed to these risks.
3. Micro savings. Regular banks may not be accessible for many people, and savings accounts in these institutions may have high minimum balance requirements. As a solution, micro savings eliminates these barriers by allowing people to store small amounts of money without a minimum balance. For those in developing countries, a micro savings account would be useful to save up for weddings, funerals, and even retirement.
4. Micro-investing. Consistent with other microfinancing services, micro-investing allows you to invest small amounts of money without investment minimums and transaction fees. This opens up the investing world to those who are unable to buy shares or hire a broker. What you can do instead is pay for a micro-investing platform (about a dollar per month) and that platform will be responsible for investing your money in fractional shares. Since micro-investing is a bit different from other microfinancing products, let’s discuss it further.
What is a Micro-Investing Platform?
Basically, a micro-investing platform is an application where you can save small sums of money regularly. One of the ways it does this is by taking the spare change from the things you buy until it piles up. It is then put into an investment account and diversified into different bonds or stocks.
If you’re interested in investing but you don’t have the proper resources or professional skills, micro-investing is one of the ways you can get around that. It provides opportunities and lowers the barriers so ordinary people like you and me can start investing money for the future.
If you’re interested in micro-investing, TIPS Dollar is a great platform you can use. You can start investing regularly with no minimum commitment and you can also get cash back rebates on your purchases.