The Ins and Outs of Micro-financing Your Small Business
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The biggest challenge for small businesses to start out is unquestionably the financing part. To get your business up and running is a big challenge, having to attract investors or banks on your side, makes it tougher. With venture capital and angel investing ruling the investment scenario in recent years, many are unaware of micro-financing, which is becoming an increasingly popular and a viable option for small businesses.
So, what is micro-financing all about? Let’s find out from Dr. Kuldip Maity, Managing Director of Kolkata based Village Financial Services Private Limited (VFS), Kolkata and Co-Founder & Director, of Village Micro Credit Services. VFS is a leading micro finance institution registered under the Companies Act and NBFC-MFI licensed by Reserve Bank of India. Serving almost 2 Lakhs poor households in West Bengal, Bihar & Assam by giving them micro-finance and other credit plus services. Whereas, Village Micro Credit Services is a not for profit company (U/S 25 of the Companies Act 1956) and is engaged in ‘Financial Inclusion’ under Banking Correspondence Model.
Dr. Maity has visited most of the Micro Finance Institutions (MFIs) in India and also other developmental organizations of India who are working in the development sector. He is a leading National Resource Person in the Micro Finance Sector at a number of Workshops, Seminars etc. organized by acclaimed National and International agencies like: SIDBI, NABARD, CARE, NIPPCCD, RBI, ISB, CII, etc. Here is what he says:
Three key roles of microfinance
Microfinance is the provision of financial services to low-income poor and very poor self-employed people. It plays three key roles in development.
- It helps very poor households meet basic needs and protects against risks,
- This may lead to the improvements in household economic welfare,
- It helps to empower women by supporting women’s economic participation and so promotes gender equality.
Enables inclusive participation in economy
Microfinance creates access to productive capital for the poor, which together with human capital, addressed through education and training, and social capital, achieved through local organization building, enables people to move out of poverty. By providing material capital to a poor person, their sense of dignity is strengthened and this can help to empower the person to participate in the economy and society.
Creates an atmosphere of responsibility
Not only that as we are helping small business owners in lending circles they are having to support one another and in some cases they are financially responsible for each other’s loans. This interconnected responsibility helps to keep them on track and provides moral support. Small borrowers also may take careful steps at a time under our monitoring and awareness programs to avoid any kind of unexpected downfall in business.
Best for home-based businesses
This is a fact that mostly home-based businesses need some capital to get started or expand. Because traditional banks often are not interested in providing those small types of loans. Microfinance is a relatively new way of funding new entrepreneurs. I believe this is not only a business; it is a revolution for the entire society to work and strive to wipe out poverty from our society.
A unique tool among development intervention
Microfinance is unique among development interventions: it can deliver social benefits on an ongoing, permanent basis and on a large scale. However, it is important to realize that microfinance is not a silver bullet when it comes to fighting poverty in all corners. We find some setbacks in Microfinance, like: MFI’s are not allowed to provide cash credit system; sometimes new entrepreneurs ask for it as this may avail the facilities of cash credit and take the opportunity and pay the repayments as per their convenience in cash flow.
Great opportunity of women in businesses at the bottom of the pyramid
Not only that as we are providing loans to the under privileged women to start a new business, they also have lot of consumption need. As a MFI we should be very careful and also need to have strong monitoring system to ensure that the loan amount should not be misused .This monitoring system not only ensure the repayment but it also helps them in income generation and also protect them from the debt trap. To avoid misuses MFI organizes series of continuous Customer Awareness and Financial Literacy programs. This is important to understand that microfinance is a tool for directly reducing poverty and to create awareness amongst female section of our society at the ‘bottom of the Pyramid’. This is true that if the base is not strong then the entire system will fall down.
Poverty is a complex issue and is difficult to define, as there are various dimensions to poverty. But we have taken a challenge to increase income and reduce poverty to safe guard all dimensions. For that we have to focus to female entrepreneurship( at small scale), cause once the female underprivileged section of our society come forward for income generating activities the entire section of our society will be strengthen. I found this is the greatest challenge for us but we are continuously working on it.