Difference Between Microloans & Business Loans

Entrepreneurs and businessmen entertain a myriad of options when it comes to the obtainace of financial assistance for their ventures. Two of the most common types of loans that often cater to their needs are business loans and microloans.

While both allow businesses adequate access to funds, they significantly differ in terms of the amount of loan, eligibility criteria, terms of prepayment, and overall accessibility. Understanding the contrast between the two is essential for entrepreneurs to determine the right funding fit for their business.

This article will explore the differences between regular business loans vs. microloans shedding light on their unique features and benefits.

What are Microloans?

As the name 'micro' suggests, these are small-sized loans offered typically to small business owners. Individuals or entrepreneurs with limited access to financial sources. The sole purpose of this loan is to support startups and micro-enterprises. It helps borrowers cover initial setup costs, fund small business activities, or address the immediate need for working capital.

What are Business Loans?

Business loans are financial services provided by various financial institutions such as banks, online lenders, and credit unions to offer funding to businesses for different purposes. Business loans act as essential financial tools that allow businesses to access funds in order to meet their financial needs and support the business's growth and operation.

Main Points of Difference Between Regular Business Loan and Microloan

Below are mentioned the key points of differences between business loans vs. microloans:

Amount of Loan:

The loan amount in the case of microloans is limited, which typically ranges between Rs 15,000 to 1,00,000. This type of loan is specially designed to offer modest funding to small business owners, entrepreneurs, and startups who entertain the need for limited funding.

While on the other hand, business loans vary in size widely, typically between Rs. 50,000 to 50,00,000. These loans are perfect for established businesses with significant requirements for funding that may include the purchase of expensive equipment, and expansion projects, among many more.

Purpose Of Loan:

The most common use of microloans encompasses the purchasing inventory, covering the initial cost of setup and the need for working capital for businesses that operate on a small scale. The target audience of these loans may be businessmen or entrepreneurs residing in developing regions. In contrast, business loans entertain versatility and can serve a variety of purposes like expansion of business, financing equipment, management of inventory, hiring employees, investing in technological upgrades, and refinancing existing debts, among many more.

Eligibility Criteria:

Microloan programs often entertain more lenient criteria for eligibility, making them accessible to entrepreneurs having lower credit scores. Additionally, some microloan providers offer special support to businesses in economically backward areas as well as minority-owned ones.

Conventional business loans come with a stricter requirement for eligibility, which involves robust financial statements, strong credit history, collateral for larger loans, and consistent business profitability.

Terms For Repayment:

The repayment terms for microloans are shorter, which usually ranges from a few weeks to a few years. The shorter the term, the borrower will be able to repay the entire loan amount along with interest quickly, which will help the providers of microloans to recycle funds for supporting other businesses.

Business loans entertain longer repayment periods as compared to microloans which may last for several years or even decades. Longer loans may result in smaller monthly installments making it easier for businesses to secure efficient management of cash flow to run the business smoothly.

Rate Of Interest:

Microloans are offered at a higher interest rate, especially due to the higher administrative costs associated with the processing of small-sized loans. While business loans usually offer competitive rates of interest, especially to businesses with outstanding credit scores and financial stability.

Conclusion:

Thus to conclude, if you intend to distinguish between a regular business loan and a micro loan to determine which one would be the right fit, considering all the factors mentioned above will assist you in making informed decisions and choosing the one that aligns with your financial goals. Additionally, it is also essential to note that different lenders entertain different loan terms and interest rates. Therefore engaging in deep research and comparing would lead you to appropriate decision-making.