What is micro lending?

What is micro lendingIn plain language, micro lending, or as it is also called micro-crediting, represents the way of making small loans for people having no credit history, collateral or steady employment. Micro lending breaks stereotypes that ‘it takes money to make money” and proves to be an innovative way to stand against poverty. Focusing on small loans helps small businesses or just people who have a good idea but do not qualify for taking a loan from traditional lenders. Institutions that provide micro lending services mainly connect those who need financing with those who are ready to invest. The scheme by which the majority of these programs operate is that a borrower places loan accounts along with a detailed description and any pertinent data. Then investors decide which loan to invest in and how much they want to sponsor. After the loan is disbursed, the borrower starts to pay the debt along with the interest accrued in small installments in accordance with the terms of the concluded loan agreement. In case the borrower fails to repay the loan and defaults on the agreement, the parties are able to recognize an investment as a charitable donation. Thus, a lender can obtain a tax deduction for the majority of the loss, so is not totally unsatisfied. There is also a possibility for lenders to position their loan as government grant, thus avoiding the risk of losing anything.

Who are micro lending clients?

Typical clients who apply for microloans are people with low income who have no opportunity to apply to traditional financial institutions. Self-employed entrepreneurs including street vendors and owners of small retail shops are also often among microfinance clients. Some but not all of them are farmers who deal with food processing activities. Though there is limited information on clients’ poverty status, the most of them admittedly fall somewhere near the poverty line. Before applying for a loan, you should take the following steps:

  1. First analyze the market you operate in, your competitors and make a business plan.
  2. Refresh your CV and prepare CVs of other senior managers.
  3. Obtain data on your personal and business tax returns for the last years.
  4. Think over your profit, cash flow, and revenue expectations for the next 3 years, you will have to provide a detailed explanation.
  5. If you already run business, you should provide your financial statements for the last 3 years.
  6. Be ready to explain as thorough as you can that you really need the loan and that it will make your business prosperous.

You can use microloans to:

  • expand existing business;
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  • start up a new business;
  • get financial, management or marketing support;
  • purchase equipment or acquire working capital.

While it seems to be a good opportunity to get cash, it is vital to adhere to the following DOs and DON’Ts in order not to make a blunder.

DO find out how your lender calculates the interest rate and compare it with current market interest rates. DON’T put your signature under any blank parts of the paper to make sure nothing will weaning off zoloft be added to that part of the page.
DO conclude a written contract reflecting the exact sum you are borrowing, the interest amount, the number of installments, and the payment period. DON’T take more than you actually need.
DO break the contract and pay the money back within 3 days if you generic cymbalta have suddenly changed your mind. DON’T take a loan in order to liquidate a previous one

However, sometimes micro lending proves NOT to be an appropriate choice. Microfinance is not the best tool for the poor, which can often become unable to pay back the debt. In this case, public resources or grants are more expedient way to transfer the resources to them. Too much risk arises when the only way to discharge the debt is to start a successful business. Human basic needs including food, shelter, and work are in most cases more needed than services of financial organizations. Therefore, they should be financed by donor subsidies and government. Microfinance is often used to address social and economic problems including disaster management, increase in employment, and relocation of refugees. Micro lending can be actually useful and effective in these situations but certainly not as the only remedy to resolve the problem. Development and implementation of a successful micro lending program depends on a number of factors, the most essential of which is the ability to make regular payments. [wpsocialite]