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Pros and Cons of Starting a Microfinance Company

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Pros and Cons of Starting a Microfinance Company

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Microfinancing is a flexible field with approximately low entrance requirements, so it may be a good choice for people who want to start a new business. But as with any other business idea, microfinancing has pros and cons.

But first, let's briefly recall what microfinance loans are in general and the difference between microcredit and microfinance.

Microfinance loans

Microfinance is a type of banking service that provides loans to businesses and individuals who can not qualify for traditional loans because of low incomes or the small amount of money needed for a short term. Compared to standard loans, microfinance normally has higher risks of non-repayment of the loan, which influences interest rates as they are typically much higher than in ordinary banks. As a result, you can borrow even £2 or £3 from a microfinance company in some cases.

Microcredit vs. microfinance

Microcredit and microfinance are often going hand in hand as these terms are closely related. But what is the difference between them? The main difference is that microfinance has a broader definition. It includes microcredit, insurance, savings facilities, and other services that can come in one package of financing. Thus, a microloan is only a small part of microfinance.

Now, as all the terms are defined and clear, we can move on to the advantages and disadvantages of such a business.

Advantages of starting a microfinance business

  • Flexibility. Microfinance is quite a big field where you can choose between different directions and types of services you offer. So if you put your time into researching, you can choose the most effective business model that will work for you.

  • Low threshold for entering the industry. It is possible to start a microfinance business right from your home. Everything you need is your laptop and the right consumer lending software.

  • Little startup costs. The cost to start a microfinance business depends on many factors, but it is normally less than for most businesses. You don't need to invest in the products that may not sell, rent a warehouse, deal with shipping companies, etc. You need to do deep research, open a legal entity, find some amount of initial investment and select a reliable software vendor.

  • Scalability. Demand for high-quality banking services with easy access is growing every day. This forces the branch to change, improve, and grow too. Thus, you will always have the opportunity to scale your business. Moreover, you can always implement new business models and pricing tiers that will allow you to increase your customer base.

  • Profitability. As we already mentioned before, microloans normally have much higher interest rates compared to traditional rates. These high margins allow businesses not only to manage risks but also to get very high incomes.

  • Quick build time. You can start a microfinance business very quickly. The timeline depends on two factors only: how long will it take to deal with all the legal aspects of the business and how much time software vendor needs to deploy the required solution. For example, at HES FinTech, we can deploy microfinance software in 90 days. So if you have the paperwork done, you can start working in 3 months.

Disadvantages of starting a microfinance business

  • High competition. New microfinance companies grow like weeds. The competition is high in this field. So it's important to analyze the market and meet the needs of your customers.

  • Long sales process. Compared to other businesses, banking services have a longer sales process. It's not a gum that you see in a store and buy immediately. It takes time for a customer to investigate and make a decision about a loan. However, if you know about this, you can plan for a longer communication process and conversion.

  • An easy target for criticism. Microlending businesses are often blamed for their easy access and high-interest rates. For people who don't understand how the field works, it may seem unfair that you charge additional money for risk management. They can think that you are just trying to trick them and earn as much money as possible and get rich. So to work in this field, you need to have tough skin.

Conclusion

Starting a microfinance business has its pros and cons as any other business. We hope that now you have a better understanding of this branch and can make an informed decision if it suits you.

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