Which factor can reduce the cost of borrowing from a bank?

A guarantor can significantly reduce the cost of borrowing from a bank because they provide an additional layer of security for the lender. When an individual applies for a loan, especially if they have limited credit history or weaker financials, having a guarantor can reassure the bank that the loan will be repaid. This is particularly important for micro enterprises that may not have extensive financial resources.

The presence of a guarantor implies that there is someone with a stronger financial standing who is willing to take on the responsibility of the loan should the primary borrower fail to repay. As a result, the bank may view the loan as a lower risk, allowing them to offer better interest rates or lower fees, which ultimately reduces the cost of borrowing. This factor plays a crucial role in the decision-making process of lenders and can be instrumental in securing financing for those who might otherwise face higher borrowing costs.