Should You Consider a Microloan for Your Financing?
What is a Microloan?
A microloan, in its simplest terms, is a very small loan extended for business purposes.
The loan is offered to small business owners who need help getting their businesses off the ground (as a start-up fund) or to cover running expenses (working capital).
The amount offered ranges from RM1,000 to RM50,000 depending on the provider and the applicant itself (that is, based on income, employment, credit rating, and others).
These loans typically do not require a guarantor, but certain providers may ask for one, depending on the loan amount and other factors. You may also apply for more than one microloan from different loan providers depending on your ability to repay the loan. It's also the right time for us to remind you to stay away from Ah Longs!
In terms of terminology, ‘microfinancing/microcredit/microloans’ can hold broader meanings especially in other parts of the world, but in Malaysia it is typically a small business loan.
However, there are some exceptions; for instance, U Mobile U Micro Credit is not a business loan but a payment scheme to help U Mobile customers purchase iPhones for personal use.
What is the difference between a personal loan and a microloan?
There are quite a few glaring differences between a personal loan and a microloan.
For starters, a personal loan can be used for anything (even your business plans) while a microloan is strictly for business purposes. Just about anyone can apply for a personal loan – you don’t have to own or run a business as you would with a microloan.
Next, personal loans tend to offer higher loan amounts when compared to microloans, with financing amounts of up to RM250,000 or more, depending on the provider and applicant.
Interest rates on microloans can be higher or lower than personal loan rates, ranging from 3.5% per annum up to a whopping 21% per annum. Note that the average interest rate for personal loans falls between 7% and 8% per annum, although great deals can be had at 3.99% as well.
Similar to personal loans, the borrowing amount and interest rates of microloans depend on repayment capabilities and the applicants’ credit rating.
Though, microloan schemes are thought to be more lenient toward applicants with a poor credit rating, who lack collateral and earn a lower income.
Also, even though there are many institutions you can apply to for a microloan; personal loans are offered by nearly all consumer banks in Malaysia. And, since microloan applications can be rather competitive (especially with non-bank loans); a personal loan may be easier to obtain.
Furthermore, the maximum repayment period allowed can differ as well.
Other banks like Bank Islam or Bank Rakyat may offer longer (or maximum) repayment tenure of up to 10 years.
What this does is make repayments more affordable – but, interest costs do rise as a result.
Can anyone apply for a microloan?
This depends largely on the institution from which you plan to borrow, as certain loans are only offered to applicants from a specific sector.
Under the Micro Enterprise Fund, administered by Bank Negara Malaysia, microloans are available to businesses with a sales turnover of RM300,000 or less and that has fewer than five full-time employees.
These types of businesses are technically defined as microenterprises; however, the definition may differ depending on the loan provider.
Also, there may be added restrictions depending on the provider or scheme, such as governmental employment status, bumiputera status, applicant gender, type of sector, household income, etc.
Where to apply for a microloan?
There are several ways to apply for a microloan.
For instance, the Micro Enterprise Fund works with development institutions such as Agrobank and Bank Rakyat, as well as banking institutions (e.g. Alliance, CIMB, Maybank, etc.) to offer microloans.
You can also apply through various microfinancing schemes offered by the government e.g. the Amanah Ikhtiar Malaysia Financing Scheme and the Young Entrepreneur Fund.
Check out this list of loan schemes (for microloans and others) available in Malaysia.
So…should you apply for a microloan or personal loan?
Deciding whether or not you should apply for a microloan instead of a personal loan depends on a number of factors:
The purpose of your loan
If it is for a small business, then a microloan does make more sense.
However, if you need a loan for personal reasons, then you should consider a personal loan, as you will not qualify for a microloan anyway.
Your credit status
If you are looking for a loan to start a business but have poor credit, earn a low income, and own no collateral assets (e.g. a house); then a microloan might be a good idea.
Still, you must note the interest rate – which can be higher on microloans.
Thus, it’s best to try and apply for an unsecured, low-income personal loan at the same time and compare the rates.
Check out our list of the best personal loans for low-income earners to discover the best loan package for your needs.
3 tips for applying for a microloan
1. Find the right loan for your needs
While there are many loan options and schemes available, there may be special financing available for your specific needs or status.
For instance, if you are part of the agro-industry; Paddy-i financing from Agrobank offers a low-interest, uncollateralised microloan that may be more suitable than other microloans.
2. If your application has been rejected, find out why
All banks must provide a reason for rejecting your loan application. Thus, if your application has been rejected, be sure to note the reason.
This information will help you make a better loan application in the future and improve your chances for approval.
3. Apply to more than one bank
Do note that you can apply to more than one bank.
If you are rejected by one bank, it does not mean that other banks or institutions will reject your application as well.
Now you know how to finance your business dreams with a microloan or personal loan. Don’t put off your business plans any longer! If your immediate expansion plans require a larger sum of financing, take a quick look at some of the best personal loans out there.
Here’s wishing you the best on your path toward success!