A soft loan, also known as soft financing or concessional funding, is a loan where the interest rate is below the market rate – sometimes it may even be at zero rate Soft loans may also provide the borrower with longer repayment periods and interest holidays.
Soft loans are typically arranged when international agencies such as the World Bank provide lending for developing nations. Governments may also set up this kind of loan for projects they think are worthwhile, either domestically or internationally.
Some governments, such as China’s, arrange soft loans for their SMEs (small and medium-sized enterprises).
In 1958, Democratic Senator Mike Monroney (1902-1980) of Oklahoma pushed for the provision of soft-loans for developing nations with the World Bank as the dispenser of the aid. (Data source: World Bank)
A soft loan contrasts with a hard loan, where the money has to be paid back in a hard currency such as the dollar, pound or euro.
As soft loans have much more lenient terms, they are not generally provided by private financial institutions.
According to Cambridge Dictionaries Online, a soft loan is:
“A loan with a low interest rate, often one offered by the government of a country to another country or organization.”
Example of a soft loan
In January 2008, the World Bank’s Board of Directors approved an $18.5 million interest-free credit by the International Development Association (IDA) loan to expand the quality and coverage of health services in Bolivia.
The aim of the loan was to improve the quality of life of Bolivia’s population, specifically mothers and children.
Soft loans for businesses
In many countries, businesses may have access to soft loans. In the UK, local Enterprise Agencies offer these types of loans to businesses if they meet their requirements and stipulations.
If a British business gets a soft loan from the government, it does not usually have to be repaid until it is making a profit. If the enterprise fails, the loan is automatically converted into a grant and thus does not have to be repaid. Grants are funds that are awarded for specific purposes or project by governments, individuals, local authorities, companies or charities.
According to financingyourbusiness.co.uk “There are around 500 different soft loan schemes in the UK and the majority of these are locally based for local businesses.”
Video – Soft loans for SMEs in China