These days, small and medium-size businesses have multiple options for business funding. Among them are business loans and microloans. However, choosing the right option is a challenging task for many. Your final choice depends on several factors, including your business size, requirements, goals, and repayment capacity. Whichever funding option you obtain, you must take proper care and plan to let it work in your favor. First of all, let’s understand both these loan types and their differences.
What is a Business Loan?
These are unsecured loan types that offer to fund small and medium-sized businesses. Many NBFCs in India provide this loan for those who need financial support to grow or expand their business. Whether you need funds to expand the workplace, invest in marketing, purchase inventory, hire staff, or upgrade machinery, you may avail of a business loan to meet your business-related expenses.
What is a Micro Loan?
A microloan is a small amount loan that individual lenders offer to MSME owners who are not eligible for a conventional loan. A single person or a group of individuals may offer these loans while contributing to the total amount. Since private individuals offer these loans and bear a higher risk than conventional loans, their higher interest rates are on the higher side than business loan interest rates.
Points of Differences Between Business Loans and Micro Loans
Determining the right funding option for your business is tough for many. Although most business owners prefer business loans due to their lower interest rates and flexible repayment terms, it’s crucial to examine both options’ pros and cons and determine the best-suited option for your business funding. To help you make an informed decision, here are a few points of crucial differences between them:
- Loan Amount: One major difference between a business loan and a microloan is the loan amount available for borrowing. Microloans are usually small amount loans up to ₹ 1-2 lakhs, whereas business loans may range from ₹ 50,000 to ₹ 50 lakh. You must access your needs and borrow a loan sufficient to cover your expenses with attractive payout options and flexible repayment terms.
- Loan Term: A microloan is a small amount loan with a high-interest rate. Therefore, their loan tenure is shorter than a traditional business loan. Since microloan lenders are private individuals, they do not keep their money stuck with you for a long time. They usually offer loans for short periods only to quickly get their money back and cater to other prospective borrowers.
On the other hand, business loans come with flexible repayment terms from 12 to 60 months that you may choose according to your repayment capacity. Use a business loan EMI calculator to select a loan term with EMIs you can easily afford. Selecting a longer loan term keeps EMIs small while a shorter tenure increases the EMI amount but saves on the interest outgo. Flexible loan tenure allows you to customize your repayment tenure according to your convenience.
- Interest Rate: Another difference between the two loan types is the interest rate you have to pay. Business loan interest rate is usually lower than a microloan due to the lower risk involved. Therefore, business loans are more affordable and business-friendlier loan options for business owners with a good credit score.
- Credit Score Requirement: Microloans are often available for those with a low credit score. Lenders compensate for the risk they take by charging a higher interest rate. However, when you apply for a conventional loan, most lenders ask for a credit score of 700 or above to approve your loan.
- End-Use Restrictions: When you take a business loan, you are free to use the loan amount for any business-related purpose. Whether you want money to expand your workplace, hire skilled staff, purchase or upgrade equipment, refill inventory, or build working capital, you can use your loan amount the way you want. On the contrary, most business owners take a microloan only to settle their outstanding business debts and expenses. These include costs like rent, supply, salary, and infrastructure.
Compare the available options and select the best funding type suitable for your business requirements. Business loans have lower interest rates, flexible repayment terms, and ample loan amounts. Other attractive features of a business loan include fast approval, online application, and no end-use restrictions. Getting the right loan at the right time will help you reach your full potential and achieve new heights.