How a Microloan Can Help Your New Small Business

A loan is a useful financial instrument that enables us to get out of rough financial situations. However, a traditional personal loan has quite a few protocols, and may take several years to pay it. Microloans, on the other hand, are similar instruments, but have a shorter repayment period and do not have many strict protocols.

What is a Microloan?

Microloans are short term loans that involve lending a small sum of money (this amount depends on the lender’s regulations), which is repaid with interest over a short period. This repayment period can range from 12 months to 24 months, depending on your ability to pay.

The main difference between these types of short-term loans, when compared to a traditional loan is that the loan period is short and does not include high amounts of cash.

How a Microloan Works

Microloans work in different ways, depending on the lender’s regulations. Therefore, it is best to take an example such as the ‘Diriya’ microloan offered by HNB FINANCE.  Firstly, the following documents have to be submitted to see if you qualify for the microloan.

  • Submit the duly signed loan application.
  • Proof of identity (NIC, passport, or driver’s license).
  • Documentation proving permanent address (Billing proof, or certificate from Grama Sevaka).
  • Documentation proving cash flow and ability to repay the loan.
  • Quotations and estimations for purchasing relevant equipment (If the intention is to purchase equipment from the loan).

Once these documents are submitted and processed, a maximum loan amount of LKR 1 million can be provided to you with conditions. These conditions would include a specific interest rate, repayment period, along with other fees (This depends on the amount that has been lent to you, and your ability to repay it).

The Uses of a Microloan and Benefits for New Small Businesses

Due to the small loan amounts, short repayment periods, and faster processing of the loans, businesses can use this facility to their advantage. There are 4 popular benefits that the facility can be used in the case of your new small business.

  1. Maintaining inventory and supplies – Your new business may have difficulty in keeping a stable inventory due to financial difficulties and demand changes. A microloan can be used to avoid this problem, since you would be able to purchase the necessary inventory and supplies to keep up with demand changes. Repayment can be done with the sales revenue you gain.
  2. Managing working capital – Cash flows are unpredictable, even during a profitable time. For example, if you need cash, but there is a delay in a customer’s payment, a microloan like ‘Sahana’ offered by HNB FINANCE can easily sort out the problem, since you receive cash much faster. Once the customer does pay you, you can easily repay the loan.
  3. Maintaining payroll – Being a new business, you would always want your staff to be positive, and delaying their salary can negatively affect their morale. This is where a microloan can benefit you, since it acts as a short-term payroll solution until some cash flow comes your way.
  4. Purchasing furniture and equipment – Your new business may find it difficult to purchase the necessary equipment since you do not qualify for a leasing facility. Obtaining a microloan can alleviate this problem to an extent. A loan up to around LKR 1 million can be obtained from our ‘Diriya’ facility, which is a good alternative to purchase expensive equipment.

In short, a microloan is a financial instrument that is perfect for your new small business to avoid short-term financial problems. HNB FINANCE makes it even more accessible to you with value-added services like training programs and training programs delivered right at your home.