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Microfinance: What Is It, and Why Does It Matter?

By Nicolas Moore | March 23, 2022

Have you ever wondered what microfinancing is and how it works?

It can be difficult to understand how these loans work, but they are simple and beneficial to many people looking for a different kind of lending. They are smaller loans with an easier approval process than traditional loans, allowing for more opportunities to present themselves to small businesses. 

Defining Microfinancing

Microloans are small loans that people can lend to each other for many reasons. They can be used to lend out smaller amounts of money that traditional lenders cannot. These loans fall under peer-to-peer lending, which means someone is directly lending the money to the borrower.

Microlending is popular with those who do not normally qualify for a loan or do not need to borrow a large loan. When someone needs to borrow small amounts of money randomly, banks will not give them loans because of the complicated fees and process to receive a loan from them. Microloans benefit those people because they get a new chance to get the loan they need, allowing them to not give up hope just yet.

Microloan investing is done fully online. Some websites specialize in microlending and connecting the borrower with the investor. These sites help by checking the borrower’s payment background, helping the investor figure out the risk they will take when lending money. These lending sites can help out the microlending process by handling the entire process for all parties involved.

Microloans offer good returns for investors and help borrowers in need.

Why microloans are necessary

Microloans are necessary because they produce new opportunities for people who need to borrow money.

These loans are smaller and easier to get approved for, making it more advantageous if you need money quickly. Microloans are great for small amounts, especially when they are lower than $1,000-$2,000. Lending gets tricky when it drops below $2,000 because banks always want to lend more than that since it can become complicated to get loans to people. It can also take a long time to get the money from the loan into your account if it is needed quickly, which is where microloans come in to help.

Microloans are greatly helpful because they allow people to get small loans that will help them when they need them. Without these loans, it might not be possible to secure the small loan needed.

How microloans have helped small businesses

Microloans have helped small businesses and individuals by helping them secure the small loan they might need.

Many small businesses struggle to get off the ground in their infancy, with little capital and no real way to secure a small business loan. Sometimes, they just need a few hundred dollars to bridge them to the next sale, making it crucial to secure a microloan quickly. 

Microloans have helped small businesses in times of need when they are struggling to operate through tough times. According to nextbigwhat, there have been multiple success stories from around the world of people that received microloans. The first microloans were issued by Grameen bank in the 1970s, and many people were skeptical about them until now. Since the early 2000s, microlending has become much more common and is now a well-used type of lending for people. Without it, there would not be any success stories as mentioned. 

Sometimes, $1,000 or even just a few hundred dollars are helpful to people when they need it. When a small business is struggling, $500 might be all it takes for them to purchase more materials and resources to produce more products or create more of what they need to turn a profit. Many people have used these loans to keep their businesses operating, making it a viable option for any struggling small business that requires a small loan

Microloans or Traditional loans?

Microloans and traditional loans differ greatly and each has its advantages and disadvantages.

While traditional loans can get you larger amounts of money, they can be difficult to secure and do not always benefit your business the most. A small business microloan can typically go as high as $50,000, but most lender loans are $2,000 and under. Due to lower amounts being loaned out, it is easier for people to get the money quickly that they need at that moment. Some microlenders can even get you your money on the same day or within a week upon approval, giving your business a quick line of credit. 

The hardest part of securing a traditional loan is that banks and traditional lenders have harsh credit requirements and difficult approval processes. This can hinder your small business from securing the money it needs to move forward. If you need money quickly and a small amount will suffice, then a microloan might be right for you. It will allow you to get the money you need quickly so your business can prosper moving forward.

How to get started

If you are interested in microlending, you might be wondering where to start. 

Lendee is a website that specializes in microlending on the investor and borrower sides. They have the ‘Lendee score’, which is a combination of your credit score and other factors that help any borrower boost their score. They allow investors to set up their accounts and start lending money to borrowers that need money. Investors can set their fees and payment terms for the borrower, allowing the borrower to secure the small loan they need. Check out the Lendee website today!