Microfinance and microcredit activities help low-income or unemployed individuals fulfill personal needs in the short term and long term. These activities also help developing and underdeveloped countries balance budgets and fund social programs.
Microcredit includes all types of loans that financial institutions, such as banks and insurance companies, provide to poor or unemployed individuals. These people may live in developed countries, such as the United States, or in poor nations.
Microcredit activities may help a small business owner with no credit reference or asset to provide as collateral. Without a microcredit or small loan, the owner may be unable to operate. Collateral is a type of financial guarantee.
Microfinance is a financial practice that helps improve living conditions for the poor and unemployed in the short term and long term. Microfinance institutions usually provide microcredit services.
Microfinance plays a central role in modern economies, especially in developing countries. Most of these countries may rely on international financial aid or microfinance activities to balance annual budgets or fund social programs.
Microcredit is distinct from microfinance. However, there are instances in which the terms interrelate. For example, an entrepreneur living in a developing country seeks funding for a startup company. He may apply for a microcredit with a local microfinance bank.