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What are the most suitable loan products for micro entrepreneur?

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Transforming Micro Financing 24X7
Unsecured loans to 'no-file' micro enterprises


What do you say - What are the most suitable loan products for micro entrepreneur? 


Imagine being on RBI (central bank) committee which has been formed to develop a policy framework for Suitable Loan Products for micro enterprises.  

What aspects would you look at? Would you design Loan Products as per cashflow characteristics of micro enterprise? If yes, do most of them have similar cashflows and risk profiles? 
 
Research indicates that micro enterprise growth can be classified into four categories – 0 --> X, X --> X+, X --> X++ and X --> Y. These growth classifications have different cashflow characteristics and require different loan products. 
 
 
   

0 --> X and X --> Y
This is applicable mostly to opportunity entrepreneurs. Starting up a business or diversifying into a new business requires patient capital. Owing to uncertainty in initial months w.r.t. sales and go-to-market success, fixed repayments can not be expected until break-even, which  in turn depends on external factors like price elasticity, labor costs, raw material costs etc. In informal microenterprise sector, the most Suitable Financial Instrument which conforms to features of patient capital is ‘quasi-equity' financing wherein repayments are linked to cashflows of business.


X --> X+
This is applicable mostly to necessity entrepreneurs, who are averse to both risk and leverage. In this growth classification, there is temporary intake of working capital to fund high season sales. Owing to predictable nature of seasonality and sales cycle, borrowers can optimize on fund withdrawals and therefore, the interest expenses. The most suitable financial instrument for meeting short-term working capital needs is Cash Credit Limit/ Overdraft, which unfortunately, is not available to retail and services enterprises in informal sector in India. 
 
   

X --> X ++
This is applicable to both necessity and opportunity entrepreneurs. Expanding a business requires capital investment (say, for higher capacity machinery, furniture, shed, stock, infrastructure etc) and a repayment schedule suitable to cashflows of business. The most suitable financial instrument for meeting capital investment is a Term Loan, which interestingly is the only loan product available for all growth classifications in informal sector in India. 
What do you say - What are the most suitable loan products for micro entrepreneur? We would love to hear your feedback. 
About Us: IMV facilitates loans to MSME and small scale industries in India through partner microfinance institutions, NBFCs and SFBs. IMV’s sister concern, Enable Livelihoods Foundation which is a social enterprise, has vast experience of working in space of rural development, skill development and social entrepreneurship. The founders, themselves being social entrepreneurs in India, have authored several publications on microenterprise and entrepreneurship.  

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Pranay Bhargava
CEO & Founder
www.impaact.in
[email protected]
+91 9848748364
 

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