Wednesday, September 09, 2009

Business Idea: Micro Loan Guarantees Scheme

This weeks business idea is all about business finance, albeit not the normal kind. Apart from the usual options to finance your business like bank loans, angel funding, Micro funding, covered recently in the Angel Investment Blog and of course venture capital, what about those who do not qualify for any of the above?

Recently on Springwise, a really interesting business idea was discussed, that of Micro loan guarantees. Based on the idea of California-based nonprofit organisation United Prosperity does not provide funding for micro businesses but rather providing loan guarantees.

A traditional micro loan or donation of R1000 delivers roughly that same amount to the entrepreneur in need, but providing a loan guarantee of the same amount can result in a much larger loan from a local bank, United Prosperity says—as much as R6000.00, in this case.

How does it work: Potential guarantors browse the United Prosperity site, which features a number of pre-screened entrepreneurs in developing countries. They then choose one to help, and contribute a loan guarantee of any amount through PayPal. United Prosperity then consolidates the guarantees on multiple loans for the micro finance partner involved and issues a guarantee, which is deposited as collateral with the local bank. With the assurance of that collateral, the bank is then willing to lend funds—the amount depending on the guarantee percentage it requires—to the micro finance institution, which in turn lends to the individual entrepreneur who was supported. The guarantor can track the entrepreneur's progress building their business, and when the entrepreneur repays the loan, the funds are returned to the guarantor's PayPal account. United Prosperity, meanwhile, earns interest on guarantee funds; it's also considering charging its partners a small fee for providing the guarantee.

Now in beta, United Prosperity cites many advantages to providing loan guarantees rather than simple p2p loans: the process allows recipients to develop a credit history, making future loans easier to obtain; it reduces the interest rates banks charge the micro finance institutions involved; and it better manages risk while providing a more scalable model. So far, 111 guarantors have used the site to help 105 entrepreneurs with more than USD 11,000 in guarantees. One to partner with, emulate, or otherwise get involved in...?

Our Opinion:

Strengths: Great idea for business investors who really want to make a difference. Also a great idea for the SA Government for that matter. Your investment (and small risk) go to a worthy cause, you get to give input and share your expertise. Small guarantee can grow into somethings substantial.

Down Side:Its difficult to see a down side here. Of course your monetary returns wont be nearly as high as a fast growing tech start-up investment but that is about it.

Conclusion: Great idea for both entrepreneurs and investors. As the entrepreneur behind the business you should not find it to hard to recruit investors, you should find it fairly easy to get a bank that goes along with the idea and although you may not make a fortune in cash, hundreds of livelihoods may be created and supported through your handy work.

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