Root Capital Director Explains His Company?s Lending Role
Friday, March 13, 2009
Financing typically comes in two sizes for businesses: very large or very small. Large-scale financing caters to the needs of large businesses, while small-scale financing answers the needs of tiny enterprises. In a manner reminiscent of Goldilocks’ perfect fit, Root Capital – a nonprofit social investment fund based in Cambridge, Mass. – aims to provide much-needed capital to help such medium-sized businesses grow.
Last night, students and faculty alike gathered in the Plant Science Building for a lecture entitled “Beyond Microfinance: Finance for the ’Missing Middle’ in Africa and Latin America” to learn more about the financing avenues made available to medium-sized enterprises through Root Capital.
The lecture, sponsored by the Cornell Institute for Public Affairs as part of its Spring 2009 Colloquium Series, featured Root Capital’s Director of Strategy and Innovation Brian Milder.
The “missing middle,” Milder said, alludes to those businesses that are too large to qualify for microfinance – loans given to very small enterprises – but too small and risky to attract commercial investors such as banks and venture capitalists.
Milder explained the role that Root Capital plays in addressing the scarcity of access to reliable credit that afflicts small and growing grassroots businesses in “rural and remote areas” of developing countries. The regions of the world in which Root Capital operates include Latin America and sub-Saharan Africa.
According to Milder, the nonprofit uniquely uses future sales contracts between the potential loan recipient and the companies that buy its products as loan collateral. Root Capital makes loans to businesses based on existing contracts that, in essence, guarantee certain purchases. As long as buyers do not back out of contracts, loans will be repaid. Citing an instance of a Guatemalan coffee cooperative, Manos Campesinas, Milder explained that coffee buyers will sign and confirm sales contracts around the time of the coffee beans’ harvest. Depending on the size of these sales contracts, Root Capital will disburse a certain short-term loan to the cooperative.