Microcredit 101

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Microcredit is the process of extending small loans to low-income individuals for self-employment in entrepreneurial ventures. The need for microcredit exists because traditional banking institutions are reluctant to supply loans to clients with low income, nonexistent credit, and few assets to serve as collateral.

Microcredit differs from traditional loans in five key ways:

Size: As "micro" indicates, microcredit loans are small in size, typically below $10,000 in the United States.

Target Borrower: The typical microcredit borrower is a low-income entrepreneur.

Utilization: The loans are used to finance enterprises which will develop a continual source of primary income for the borrower.

Terms and Conditions: Terms and conditions for microloans are more flexible and designed to be easily understood.

Repayment: Because many microcredit recipients are first-time borrowers, loan repayments are broken down into smaller installments which are paid on a monthly basis.

Microcredit gives rise to financial stability and development. Microcredit institutions often offer business training for borrowers, which helps ensure effective loan repayment and sustainable growth for the entrepreneur. Small businesses help enrich the community both socially and economically. By providing individuals with the resources they need, microcredit has historically proven itself in alleviating poverty and empowering borrowers to achieve their entrepreneurial aspirations.