MICROCREDIT - REQUIREMENTS, ADVANTAGES AND IMPORTANT INFORMATION
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What is a microloan?
A microloan is a small loan that is often given to micro-enterprises or individuals who do not have access to traditional bank loans. These loans are designed to promote economic development and combat poverty. They give small business owners or entrepreneurs the opportunity to set up or expand their business. In Austria, microloans are primarily intended to help people overcome social and economic disadvantage and support business start-ups.
Microloans can help to stimulate the local economy by establishing or expanding businesses, thereby creating jobs. In Austria, microloans are also used, for example, to support self-employed people who are unable to obtain traditional bank loans due to a lack of collateral or a poor credit rating.
What conditions do I have to meet for a microloan?
The conditions for a microloan can vary depending on the provider. In general, you will need:
A business plan: Your detailed plan should show how you will use the money and how profitable your business will be. Your business plan should include your business goals, your target audience, marketing strategies and financial projections, and most importantly, a clear repayment plan.
Proof of income: You should have a stable income to prove your ability to repay. This could be payslips, tax statements or proof of other income.
Proof of residence: You can prove your residence by means of a registration form or a current bill from an energy supplier.
Credit check: Your creditworthiness is assessed via a Schufa query. Although a positive credit rating is not always mandatory, it can be helpful for the assessment.
Collateral or guarantees: If lenders consider the risk to be too high, collateral or guarantees may be required. Collateral includes valuable items, real estate, vehicles or insurance. A guarantee means that a third party undertakes to take over the loan if you default.
Some lenders have additional requirements such as attending training programs or counseling sessions. This is to ensure that you are able to run your business successfully and repay your loan.
How do I apply for a microloan?
First research which lender might be right for you. There are various microfinance institutions, banks and online platforms. You should thoroughly compare the conditions and interest rates to find the right lender for your needs. Once you have made your decision, proceed as follows:
Documents: Prepare all the necessary documents such as your business plan, proof of income and identity documents well. Check in advance that all documents are up-to-date and complete.
Application: Most providers give you the option of filling out an application form. Together with your prepared documents, you submit this to your desired lender. You can usually submit your application online, but it is also often possible to send the documents or hand them over in person at a branch.
Review and approval: The lender checks your application and documents and then makes a decision on whether to grant the loan. Depending on the provider, this can take a few days or weeks.
Payout: If your loan is approved, the documents are signed and the desired amount is paid out. You can start repaying your loan as planned.
Tip: Check your inbox and spam folder. During the review process, questions may always arise and the potential lender may request additional information or documents from you. The company needs to understand your financial situation and the feasibility of your business plan, so it's important to always be transparent and cooperative. This will give you a better chance of being approved.
Can I get a microloan despite a negative credit rating?
This is possible in principle, but depends heavily on your specific circumstances. There are providers who specialize in granting loans to people with moderate creditworthiness. They also take other factors into account when assessing creditworthiness than traditional banks. The reason for this is that there are people who are creditworthy despite having a poor credit rating, but who have no chance of obtaining a traditional bank loan due to the strict requirements of banks. However, the interest rates for such loans can often be higher and collateral or guarantees may be required.
Microfinance institutions and special loan programs in particular are often willing to take the risk - especially if you can present a convincing business plan and proof of income. These institutions place more emphasis on your personal history and potential, which can increase your chances of being approved for a loan.
Do I need collateral in any case?
Whether you need collateral depends on the lender and the specific loan terms. There are many microloans that are unsecured - especially if a solid business plan and proof of income can be provided. Some lenders still require collateral or personal guarantees to minimize their own risk.
For example, real estate, vehicles or other valuable items can serve as collateral. If you prefer a guarantee, this means that a third party undertakes to take over the loan in the event of your default. The higher the loan amount, the more likely a lender will require you to provide additional collateral or a guarantor.
How quickly will I receive the money after I have been accepted?
The payout speed also depends on your lender and can vary from provider to provider. On online platforms or with FinTech companies, you will often receive your money within 24 hours of approval. Traditional banks and microfinance institutions usually take a few days to a week.
So if you prefer a particularly fast pay out, you should try to get your microloan on an online platform. Automated processes that can quickly review and approve applications will save you valuable time. With traditional banks, the process may take longer as more extensive checks are carried out, but you may have the chance of lower fees.
Can I repay my microloan early?
Yes, early repayment of a microloan is generally possible with many providers. With the option of early repayment, you remain flexible and can save on interest costs. As soon as you have the necessary funds, you can reduce your loan amount at any time. Read the terms and conditions carefully before signing the contract. Some providers charge fees for early repayment to compensate for lost interest income.
Advantages and disadvantages of microloans
There are various advantages and disadvantages that you should consider before applying for a microloan. We have summarized the most important ones below:
ADVANTAGES | DISADVANTAGES |
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What disbursement amounts are possible with microloans?
The disbursement amounts for microloans can vary depending on the lender, but are primarily designed for smaller financing requirements.
Here are a few examples:
Microcredit Fund Germany: Loans of up to 25,000 euros.
KfW (ERP start-up loan - StartGeld): Loans of up to EUR 100,000, although the target group here tends to be small and medium-sized enterprises.
GLS Bank: Microloans of up to EUR 30,000 (especially for social and ecological projects and small entrepreneurs with good business ideas).
The amount of your microloan depends on various factors such as the intended use, your credit rating and the lender's guidelines. It is therefore important to compare offers in order to find the right partner for your project.
Does a pawn loan count as a microloan?
Below you will find the main differences between a pawn loan and a microloan:
pawn loan | Microcredit | |
|---|---|---|
Definition of | A pawn loan is a short-term loan that is secured by pawning collateral such as jewelry or electronics. | A microloan is a small loan that is often unsecured and is granted to micro-enterprises or individuals who do not have access to traditional bank loans. |
Process | You deposit collateral as security. The loan amount is a partial value of your item. If you repay the loan including fees, you get your item back. Otherwise, it will be auctioned off and you will be paid out the surplus less fees. | You often have to submit a business plan and proof of income. The granting of a loan depends on your creditworthiness and your business model. |
Term/pay out | You will be paid out immediately after your pledged item has been valued and accepted. The term is 1-3 months with the possibility of extension in the online account. | The repayment period depends on the provider. Microloans usually have longer terms and flexible repayment plans. |
Conclusion: A pawn loan is different from a microloan. Pawn loans are loans secured with collateral and are aimed at short-term financial bottlenecks. Microloans are usually unsecured and are aimed at long-term support for the self-employed and small businesses.
While a pawn loan can be useful for you if you need money quickly and can offer collateral, a microloan is more for you if you need long-term support for your business model.
Can a pawn loan also help me start my business?
A pawn loan can help you bridge financial bottlenecks or generate start-up capital in the short term. Weigh up the pros and cons carefully.
Advantages of a pawn loan:
Quick liquidity: A pawn loan gives you immediate access to cash, which can be particularly useful if you need capital quickly.
No credit check: Your financial situation is irrelevant, as a pawn loan is secured by your collateral.
Disadvantages and risks:
High costs: Pawn loans are designed for short-term bridging and have higher interest rates and fees in comparison.
Possible loss of collateral: As with other loans, you may lose your collateral if you are unable to repay the pawn loan. However, you remain debt-free, as an auction always covers the entire loan amount. You will be paid out any surplus.
Realistic scenario:
If you want to finance your first steps towards starting a business, obtaining the necessary working capital can make it easier for you to get started. Make sure you have a solid business plan so that you can guarantee repayment.
Other important aspects of microloans
Target groups and areas of application: Microloans are often aimed at specific target groups such as small entrepreneurs, the self-employed, women and disadvantaged groups. These loans are intended to help create economic opportunities and reduce social inequalities.
Additional services: Many microfinance institutions offer training, counseling and networking. These additional services are designed to increase borrowers' chances of success and provide them with the necessary knowledge and skills to run their businesses successfully.
Microcredit and social impact: Microcredits contribute to poverty alleviation and economic development by giving disadvantaged groups the opportunity to participate in economic life and improve their quality of life. They promote financial inclusion and offer people who do not have access to traditional financial services the opportunity to improve their economic situation.
Risk management: Microloans are often associated with higher costs and risks. It is important that borrowers realistically assess their financial situation and ensure that they are able to repay the loan. Lenders use various measures to minimize risk, including requiring collateral or guarantees and conducting thorough credit checks.
Legal framework and regulations: In many countries, there are specific legal frameworks and regulations for microloans. These regulations are designed to protect both borrowers and lenders and ensure fair, transparent conditions. It is important to find out about the legal requirements and protection mechanisms in your country.
Success stories: There are many successful examples where borrowers have been able to establish or expand their businesses with the help of microloans. These success stories show how microcredit can serve as an effective tool for promoting economic independence and creating jobs.
The most important questions and answers at a glance
What is a microloan?
A small loan for people and companies who do not have access to traditional bank loans.
What conditions do I have to fulfill?
Provide a business plan, proof of income, proof of residence, sometimes collateral or guarantees.
How do I apply for a microloan?
Choose your desired lender, prepare the necessary documents and submit the application form with enclosures.
Can I get a microloan despite a negative credit rating?
Yes, that is possible. But you often have to expect higher interest rates.
Is collateral required?
Depending on the lender, collateral or guarantees may be required. However, many microloans are unsecured.
How quickly will I receive the money after I have been accepted?
Online platforms often pay within 24 hours of approval. Traditional banks need a few days to a week.
Can I repay the microloan early?
Yes, early repayment is possible, but fees may apply.
Microcredit at a glance:
ASPECT | DETAILS |
|---|---|
Definition of | Small loan for individuals and micro-enterprises without access to traditional bank loans. |
Target group | Small business owners, self-employed |
Conditions | Business plan, proof of income, proof of residence, credit check, often also securities or guarantees. |
Credit application | Select lender, prepare documents, complete and submit application form, review and approval, disbursement and repayment. |
Payout period | Online platforms: within 24 hours, traditional banks: a few days to a week. |
Early repayment | Possible, but fees may apply. |
Costs and fees | Higher interest rates and fees compared to traditional loans, processing fees, possibly early repayment penalties. |
Collateral | Often unsecured, sometimes collateral or guarantees required. |
Advantages | Access to financing, lower requirements, promotion of independence, economic and social development. |
Disadvantages | Higher interest rates and fees, limited loan amounts, short repayment periods, risk of over-indebtedness. |
Payout amounts | Microloan from the Federal Ministry of Labor: up to 12,500 euros, Erste Bank and Sparkassen: up to 15,000 euros, Bank Austria: up to 25,000 euros. |
Pawn loan vs. microcredit | Pawn loan: short-term, secured by collateral, quick pay out. Microloan: unsecured, for long-term support of small entrepreneurs, longer terms and flexible repayment plans. |
Would you like to know which collaterals you can use as collateral for a pawn loan with CASHY? Find your item and find out online how much money you can borrow for it.
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Sources: BMAS Germany, KfW Bankengruppe, Verivox Germany, Mikrokreditfonds Germany, Smava Germany, abcfinance Germany, GLS Bank
All information without guarantee. Errors and omissions excepted.