Shital Shah

iuMAP: The Next Level of Micro-credit is Distributor Finance

(Above: Swayam Sikhsan Prayog (SSP) is a Mumbai-based novel micro-franchisee model that empowers rural women to run their own businesses).

Editors Note: This blog post is the first part of a series on financing distribution networks from Ayllu, developers of the iuMAP, a web-based social enterprise directory launched in media partnership with NextBillion. You can help increase iuMAP’s size by submitting social enterprises and giving feedback.

Financing distribution networks isn’t exactly a sexy topic. Yet, distributors are a key part of any value chain, and without them, there would be no way for a product to reach a large number of customers. Many social enterprises focused on BoP customers use independent or franchised distributors that also are from poor communities and need financing to cover startup costs, such as equipment and initial inventory. Given the emphasis and urgency to scale solutions, finding workable ways to fund distribution systems is a critically important – but difficult – endeavor.

From the point of view of financers, putting money into the distribution system, or into franchise startup costs, is not an obvious move. First of all, a social enterprise franchise is a less-proven model than traditional income-generating products like a cow or a sewing machine. The income stream, and therefore the likelihood of repayment, is seen as less predictable. Second, franchisees are often adding on the social enterprise business line as a part-time activity. For example, a franchisee of an energy company selling solar lights usually is managing that on top of many other products and services. The risk involved and difficulty pricing loans to match the cashflow of these small enterprises makes financing distributors unattractive.

The situation is a classic chicken-or-egg dilemma. Franchises need money to grow and scale; funders want to see the proof of scale first.

Let’s take a closer look at a few examples. Drishtee helps to foster village-level IT entrepreneurs and has develop a network of more than 5,000 centers offering a variety of services through kiosks. Depending on which services are being offered, different franchisees are required to pay varying startup amounts to join. If Drishtee-sized entrepreneurs were able to access the right financing, they likely would be able to scale further and faster. However, only 10% of its entrepreneurs had the financial strength to even pay the franchisee fee upfront. Some 30% managed to raise financing from banks with collateral and 60% were found credit-unworthy by banks. Most of the micro-entrepreneurs are supported by Drishtee, outside investors, or other soft funding sources.

VisionSpring partnered with Bangladeshi NGO BRAC, which have trained community members to act as health workers and sell health products, including reading glasses. By working with BRAC’s already established network, the program scaled to include 60,000 trained workers. However, BRAC did not offer these workers financing and only about 7-10% of the health workers sought out loans to grow their work. It’s unclear how many of the remaining workers received or used financing. Many are likely to have used a cash and carry model whereby they would only pay for as much inventory as they could afford upfront, and restock when they sold enough.

A natural place to look beyond commercial banks is microfinance institutions. However, MFIs do not normally offer appropriately structured business financing as needed by franchisees, and are often operating on low enough margins that they are not interested in diversifying their loan products.

Revolving loan financing, which is less risky for lenders because they are paid back more quickly, is an option when distributors need working capital rather than one-time investments. SKS Microfinance’s kirana (corner shop) store network uses this approach. SKS provides the working capital for kirana stores, which make up 13% of its client base. Each kirana store has a Rs 15-30,000 (US$3-600) working capital loan, which they pay back in one month. This is certainly one way of financing franchises; however, the revolving capital model is not useful for startup costs, which often have to be paid back over a longer period.

Clearly, access to credit is a major hurdle for microfranchises. There has been well-deserved attention on growing small and medium enterprises; however, in reality, it is the small enterprises that still need more support.

In coming posts, we will focus on Milaap, an organization partnering with MFIs and rural distribution networks to crowdfund low-cost, risk tolerant capital for microentrepreneurs, catalyzing adoption of basic livelihood services including affordable lighting, clean water and sanitation, and organic farming aids.