Microcredit for small businesses is an important source of external finance for small businesses. A microloan service may be the only source of external finance for a small business. Providing initial support is crucial as it establishes a financial track record for the small enterprise and makes future access to external finance easier.
Tax incentive
Microcredit provision is a challenge. Banks consider it a high-risk activity with low returns. This is due to high failure rates and high handling costs. However, some institutions are embracing the risk and taking part of the credit risk, providing small businesses with small loans. This is particularly helpful in developing countries, where the lack of access to finance is one of the biggest constraints.
Denmark is a good example of a country that has made microcredit provision easier for SMEs. The country’s small business development centre and the National Unemployment Office introduced a pilot scheme to increase access to this type of credit. The scheme included national funds supplemented by local sources of finance. The scheme attracted strong demand, generating 548 new jobs by 2000. While the national fund for the scheme was exhausted by the year 2000, it continued in certain regions because of additional resources.
High risk
High risk microcredit for small businesses is a type of small business lending, which is often difficult to obtain from traditional financial institutions. Because of the risks of lending to this type of business, the interest rates charged are often higher. However, if a business is more reliable and has a history of success, the higher interest rate may be worth it.
A new report by the Enterprise Directorate General focuses on the access of small businesses to finance. The report examines the relationships between these enterprises and credit institutions, guarantee societies and business support services. A key finding from this study is that many SMEs do not repay their loans when due.
Low return
The provision of microcredit is a difficult activity due to the high handling costs and perceived high risk. Nevertheless, some credit providers are willing to take risks to support the creation of small businesses. These institutions may offer credit to SMEs in general or to a particular economic sector or geographical area.
The MGS scheme aims to support the development of small businesses by lowering the risk to microlenders. It works by guaranteeing small loans. Its members own or work in small businesses and know their market well. Consequently, they can assess loan applications and estimate their revenue prospects. A MGS guarantee reduces the risk to the credit institution and results in a lower interest rate for the microentrepreneur.
Availability
Microcredit for small businesses is a way of providing small loans to people who don’t have access to conventional finance. In the past, banks have been reluctant to provide this type of credit, but today, more alternative lenders are developing new ways to serve small business owners. Grameen Bank, an organization that helps poor people start and run businesses, developed the concept of microcredit, and has since expanded to thousands of organizations around the world.
The EU has been supporting microcredit for small businesses through its Multiannual Programme for Enterprise and Microfinance guarantee window. It has also been working to promote the role of financial institutions in the microcredit sector. In the EU, microcredit for small businesses is defined as a loan that is less than EUR 25,000.
Access
Access to microcredit for small enterprises is often challenging, particularly for start-up enterprises. However, it is often easier for existing small enterprises. According to a recent pan-European study, micro-enterprises are more likely to perceive access to finance negatively than larger enterprises. This is perhaps not surprising given that the vast majority of companies are very small: 93% of all businesses in Europe are micro-enterprises. Moreover, most micro-enterprises are self-employed and do not have a goal of expanding or achieving larger scale status.
Microlending institutions are nonprofit organizations that offer small-business loans. They are an important part of the small-business lending ecosystem. They provide loans to entrepreneurs who have limited or no collateral. They can provide capital for small business training, equipment purchases, working capital, and more.
Impacts
A new report by the Enterprise Directorate General (EDG) examines the impact of microcredit on small businesses. It explores the relationship between microcredit and small enterprises and the relationship between such enterprises and financial institutions, guarantee societies, and business support services. The report also describes some of the best practices in microcredit.
The study also provides a robust estimate of the impact of microfinance on the businesses that received the funds. It found that the businesses that received microloans changed their business models by reducing their costs and hiring fewer unproductive employees.
