FNB outlines the disadvantages of using micro loans for business

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Sometimes you just need a little bit of money to make it through to the end of the month and for this there exists micro lenders.

For the regular Joe on the street, a micro loan may be a tempting offer but for businesses they are a bad idea.

This is according to Morne Cronje, head of franchising at FNB Business. The firm has noted an uptick in the number of entrepreneurs considering micro loans but the he advises against it.

Speaking specifically about franchises, Cronje says that micro loans lack the holistic financial services that can sustainably support a franchise.

“In the long-term, they present many disadvantages for the franchise,” says Cronje.

One of these disadvantages is the lack of the ability to restructure or renegotiate the terms of the loan. This could be a disaster for a franchise with cash flow or working capital challenges.

This can also be further complicated by massive interest rates that accompany micro loans. Because these loans are generally for a shorter time period than a loan you could get from a bank, the interest rates can be exorbitant.

“Before applying for funding, consider the overall value and support you are getting from your financial institution. The decision should not be solely based on finance, but access to banking solutions that can assist with the alternative funding, scalability and more,” explains Cronje.

Banks do also offer a wider array of services for franchise owners and indeed, any business owner.

While it may be tempting to make ends meet quickly, for now the best option for financing in a hurry is a bank. It’s also just a good idea to deal with an institution that can be held accountable should something go wrong.

While we’re not saying micro lenders aren’t accountable, they might not have the proven track record of a bank.

The best advice is of course to do your research and find a solution that fits your firm best.

[Image – CC 0 Pixabay]

Brendyn Lotz

Brendyn Lotz

Brendyn Lotz writes news, reviews, and opinion pieces for Hypertext. His interests include SMEs, innovation on the African continent, cybersecurity, blockchain, games, geek culture and YouTube.