Microfinance for Small Businesses

Microfinance refers to the finance that is made available to all sorts of different entrepreneurial and small business ventures. Varying from case to case, these finances may be in the form of either a loan or an investment in the ownership of the company.

The underlying difference between microfinance institutions and regular financial establishments is that they specifically target small business ventures. The major clients of any conventional corporate bank are mainly large corporations. Even if these banks deal in the SME sector, they refrain from lending out loans to new small businesses and prefer established medium sized enterprises over them.

This behavior of conventional banks and other similar financial institutions dealing in the corporate and SME sector is understandable. All financial institutions work primarily on the basis of the risk involved in dealing with a particular client. Small businesses and other new entrepreneurial ventures usually pose as a particular threat because of the level of stability required to guarantee the return on the institution’s investment has not yet been attained. Conversely, established medium sized enterprises and other large corporations serve as a more risk free option and competing institutions fight each other off in order to get them on their list of clients.

Microfinance institutions, however, would be more than happy to invest in small business ventures, provided the owners come up with an impressive business plan. Like their owners, these microfinance institutions are high risk takers; something that regular conventional and corporate banks are not. Microfinance institutions, which usually comprise of venture capitalists and other high risk taking investors, understand the position of the market and the growth that the potential client has to offer almost as well as the entrepreneur himself.

Due to the high risk involved in dealing with small businesses and new entrepreneurial ventures, their owners find it hard to obtain external modes of finance. Since there has been a significant rise in the number of such ventures in recent times and they now serve as a major contributor in any country’s economy, it is ironical that they should be denied modes of finance and obtain the growth that their ventures can achieve with the proper funding.

The existence of microfinance institutions, however, serves as solution to this problem. Since they specifically target small business ventures, a successful investment made in any client organization would benefit not only the institution but also the client and the economy of the country as a whole.

In all such cases, the owners of the small business have to come up with a good business plan which they plan to implement in the coming years. If the microfinance institution deems them as viable business options, a loan is granted on terms so easy that the client would never again want to go to a conventional bank. Funnily enough, once he grows large enough, that is exactly where he would have to go in order to obtain finance for further growth opportunities.

Author is a life experience degree holder who rose through the ranks at his place of work thanks to his hard work and the prior learning degree program.