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Home»Money»Loans & Financing»Which is the better loan option for small business?: Bank Vs. Microfinance
Loans & Financing

Which is the better loan option for small business?: Bank Vs. Microfinance

MYNIUSLINEBy MYNIUSLINEJuly 16, 2021Updated:July 16, 2021No Comments5,915 Views
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Banks and microfinance are two major financial institutions that offer savings and lending services to the public. They’re governed by a set of laws in the banking sector and monitored by the Central Bank of Kenya. As such they adhere to a set of requirements in their procedures. On the other hand, loan sharks aka shylocks, don’t abide by the set finance laws. They capitalize on the borrowers’ need for quick money and offer finance with a less rigorous vetting regime and often at high interest rates.

Banks were the first on the scene as the mainstream financial institutions. For instance, The Standard Bank of South Africa Limited made an entry in Kenya in 1912 according to a 2017 report by the Central Bank of Kenya.

Your choice of the lender, whether it’s a bank or microfinance should be informed by various factors that vary from one case to the other. But it helps to know some Standard Operating Procedures (SOPs) of each lender and the products offered. Some of them are as follows;

  1. Banks

Banks established themselves early as the mainstream lender having been around longer and with bigger financial muscle. That comes with the following advantages;

  • Confidence that deposits are safe in their fold and are a partner that will be around a while. That comforts and enables long-term plans.  
  •  Offers loans of larger amounts for bigger projects. This makes them ideal for bigger investments.
  • Banks don’t patronize the expenditure of the awarded loan.
  •  Larger loans they can offer enable repayment over a longer period giving room for adjustments and less stressful repayment journey.
  •  Secured business loans give you a good opportunity to negotiate for better terms including the interest rate on the amount.
  • Microfinance

Microfinance is an idea with origin in Bangladesh and conceptualized in Kenya mid-1990s and through the Microfinance Act 2008. It came to the financial scene and took up the section of the population with modest or irregular income and that was locked out of the banking products by stringent measures. This positively impacts the financial life of this significant and ever-growing segment of the population. It has provided an alternative and rescued several less privileged income earners from the shackles of the shylocks. Most microfinance doubles up as deposit institutions allowing for savings that earn interest. The advantages of microfinance are as follows;

  • Microfinance provides reasonable and small value loans. The small value credit is popularly known as microcredit and is readily available even without security.
  • Though they work under regulations, they tend to offer more flexible repayment terms and rates.
  •  They train and grow membership into the savings culture which helps them build assets.  That empowers them to borrow bigger amounts and manage bigger projects.
  •  Microfinance tends to work closely with the membership and hence offer other related and much needed support to projects.

The decision should narrow down to what serves your situation the best with the facts provided. Remember that individual cases differ from one to the other. All the available pros and cons should be analyzed before a decision is made. In general, the viability, nature, size, and when the project should be funded in comparison with eligibility and terms offered should guide.

Kindly lets know your opinion in the comment section

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