NextBillion - A WDI Publication

In 2021, BharatRohan — an Indian agritech enterprise which helps farmers cut input costs and increase profits by using hyperspectral drones to identify crop distress — needed more working capital as their business grew. Villgro, an entrepreneurship support organization (ESO), stepped up to back BharatRohan with a first-loss guarantee and due diligence support, enabling its first-ever institutional loan of $30,000 from Caspian, an India-based impact investing firm. Four years later, BharatRohan listed on the Bombay Stock Exchange’s SME platform and was oversubscribed more than 10 times.

Between the first loan we at Villgro guaranteed and the company’s eventual IPO, there was a credit ladder that BharatRohan had to climb rung by rung: accounts receivable financing from a second lender, a non-convertible debenture from a third, a follow-on loan from Caspian Debt without any guarantee, a warehouse credit line, and finally a bank overdraft provided at the lowest interest rate in the entire journey. Each rung was reached by successfully repaying the previous one.

While grants and equity dominate the conversation in impact finance, our experience shows that debt is often the most practical tool for enterprises that need moderate amounts of capital, i.e., between US $50,000 and $300,000. Debt has high potential to bridge this missing middle of capital needs — too large for a grant, too small and early for most equity investors. At the same time, debt providers face real and perceived risks around the creditworthiness of the sector or enterprise. That’s where a guarantee from a trusted intermediary to repay the loan in case of default can make that debt accessible.

However, across the 12 enterprises we initially supported through this model of guarantee-backed debt, we learned that a guarantee alone is not a silver bullet; the harder work was solving the problems that keep enterprises stuck. From our work, we have identified four major problems that must be addressed – two of which involve the enterprises, with the other two related to the lenders. I’ll highlight those challenges below, sharing some key takeaways for the ESOs and other intermediaries that provide debt guarantees and other support to these businesses.

Problem 1: Customers are not confident in the enterprise’s product

Guaranteeing loans to enterprises can only take you so far. For many of these entrepreneurs, who are often selling technologies that would increase customers’ long-term revenue in exchange for a high upfront cost, the product itself may need additional financing support to give customers the confidence to invest in it.

Take the case of Raheja Solar. They developed solar drying technology to help smallholder farmers — primarily women in cooperatives — preserve produce, as processed goods can earn significantly higher margins. While the model was effective in the long-term, farmers faced a risk that made them less likely to buy the dryers: They did not know if their increased margins would be enough to justify the investment. Since they had to take a loan to buy the dryers, they needed to have confidence that a market would be available to generate enough revenue to pay off the loan.

To address this concern, we structured a two-sided financing intervention: One element consisted of a guarantee-backed loan to the farmers and cooperatives from Samunnati, a lender specializing in farmer-producer organizations, so they could afford to buy the dryers. This was further supplemented by a guarantee from Raheja Solar to buy all the dried produce sold by the farmers, which was paid for by an additional Samunnati loan guaranteed by Villgro.

The results, according to Raheja Solar, included 36 solar dryers installed at six farmer producer organizations, 240 farmers with access to the technology, and approximately $450 in additional annual income per user. Raheja’s demonstrated model, along with Villgro’s guarantees, attracted two other Indian lenders who gave additional end-user financing. The positive reviews from pilot customers helped drive sales of these solar dryers in new geographies.

Takeaway for intermediaries: When an enterprise’s sales are stalled, the instinct is to find more capital for marketing. But working directly with customers often reveals that the barrier is market uncertainty; they do not know if they can recoup their initial investment in the product. We must solve this market confidence problem before financing can flow.

Problem 2: Enterprises reach for equity when debt would move faster

Impact enterprises at a growth inflection point often default to raising equity. The reasoning is understandable: Debt feels risky to entrepreneurs amidst uneven revenue, and equity investors seem like a more attractive option for securing growth-stage capital without the burden of monthly payments. What these entrepreneurs don’t realize is that debt can be a good choice, especially when time is of the essence.

SNRas Systems provides a good example of the advantages of debt capital. The company developed the BlueBox, a nano-recirculatory aquaculture system that the company estimates can increase fish egg hatching rates from 70% to 95%. The enterprise had retail contracts, a clear path to expansion, and a strategic acquisition opportunity that would help them reach new supply chains and market segments. The only thing missing was $60,000 in working capital, and they needed it within weeks, not months.

An equity round would have taken far longer than the opportunity allowed. So in 2023, we at Villgro guaranteed a commercial loan from Caspian. SNRas used the working capital to complete the acquisition, expand into live fish transportation, and open four new retail stores. This unlocked exceptional revenue growth, from $72,000 in 2023 to over $1 million by 2025, according to information the company shared with Villgro. The enterprise has since raised over $1.2 million in debt and equity from multiple institutions without the need for a guarantee.

Takeaway for intermediaries: Rather than wait months for an equity round and miss a vital market opportunity, debt is faster, allowing the enterprise to meet key deadlines and reach scaling milestones that make them more attractive when equity investment becomes the right fit. Intermediaries may need to clarify the advantages of debt capital to entrepreneurs, addressing their concerns, explaining why equity isn’t always the best option, and helping them build a capital stack that’s suited to their current and future needs.

Problem 3: The lender perceives risk the enterprise doesn’t actually carry

Enterprises that are genuinely creditworthy but operate in sectors that lenders have no framework to assess face another challenge for accessing debt: For lenders, low visibility means high risk. They perceive the operational and financial risk of these enterprises as high and mis-priced because of their own lack of exposure to the market. As a result, they reject loans to entrepreneurs working in sectors like aquaculture engineering or biocomposite materials, because no one at the lender has ever underwritten debt to those types of companies before.

Take the example of Spectrus Sustainable Solutions: By 2023, they had been producing biomaterials from bamboo fibers and agricultural waste for eight years. They had a consumer brand on Amazon, inbound business-to-business orders from large corporates, two consecutive years of profitability, and over 1,000 product SKUs. But none of that mapped to a standard credit assessment, which prioritizes metrics like interest owed on existing loans, and current assets/liabilities, making it difficult for the company to obtain debt capital. Thanks in part to a default guarantee provided by Villgro, a lender, Nabkisan, was willing to provide a $125,000 loan. But what changed the lender’s understanding of the sector and willingness to stay engaged was our ongoing relationship with both parties: Villgro’s regular check-ins with Spectrus, aimed at documenting its repayment performance and addressing other potential concerns, and our explicit discussions with Nabkisan about how the enterprise’s risk profile compared to the lender’s initial assumptions.

Spectrus repaid the loan ahead of schedule. A major commercial bank, HDFC, subsequently extended a $300,000 unsecured loan at market rate with no guarantee required. The best part was that we were not involved in this transaction; Spectrus got the loan with a repayment record that spoke for itself.

Takeaway for intermediaries: A guarantee changes lender risk exposure but it does not automatically change lender understanding. That requires deliberate engagement — repayment updates, risk profile discussions and sector context — throughout the loan cycle. It’s important to help lenders update their calibration of the sector based on evidence.

Problem 4: The loan sizes are too small to make it worthwhile for lenders

Even when an enterprise operates in a known and lendable sector, they may still receive a “no” if the loan size is too small. For lenders, the economics of small-ticket loans are unfavorable, leading them to focus on larger tickets.

BharatRohan faced this issue with its first small working capital loan of $30,000. For Caspian Debt, the operational cost and effort of underwriting did not justify approval, even with a guarantee. So Villgro assembled a complete due diligence file and shared it, along with a curated pipeline of lendable clients, with Caspian. The information reduced their operational costs, for the Caspian loan and more broadly, making it more feasible to offer a loan of this size.

We deliberately selected Caspian Debt because their ticket size range could accommodate BharatRohan’s future needs. That thinking paid off; as mentioned earlier in this article, BharatRohan received a second, larger loan from Caspian without needing a guarantee.

Takeaway for intermediaries: For small-ticket loans, it’s helpful to reduce the lender’s operational burden directly with a complete, curated due diligence file and a pipeline of similar enterprises, to reduce operational costs and make the economics work. While our role as ESO is to support social enterprises, lenders may also require support, as they must see a risk-return proposition that fits their mandate.

Conclusion

Across these enterprises, Villgro provided the same financial instrument, a first-loss guarantee, each time. What changed was the problem the guarantee was designed to solve — along with everyone’s willingness to design an intervention around the problem rather than around the instrument. 

Guarantees are not new and have been used for risk reduction for many years. Combining this well-understood instrument with ways to address the specific problem faced by the social enterprise is the key to addressing gaps that guarantees or technical assistance alone cannot bridge.

Srinivas Ramanujam is the CEO of Villgro Innovations Foundation.

Photo credit: PRASANNAPiX