When entrepreneurs need a loan, transparent financial reports, impartial audits and effective courts make it possible to detect the creditworthiness and ability to pay of the creditor. In many emerging economies, where such supports do not exist, the community plays an important role in accessing loans.
When many market institutions governing finance are lacking, the community plays an important role in accessing credit, providing information and some measure of insurance against default.
Since many retailers in developing countries depend on commercial credit from wholesalers, business and credit decisions are analyzed, including terms, responses to defaults, information collected by lenders and characteristics of the bond, as well as the duration of the bond. the relationship to determine unwritten credit policies.
Gender, age, education, years of operation, and other demographic information are also recorded. The result? there is an indirect reciprocity mechanism that explains the cooperation between wholesalers and retailers in the same community.
Business credit is widely used. Almost three-quarters of all commercial links involved extending or accepting some amount of loans. When such loans were not offered or received, there were common reasons, such as previous non-payment, distance between the wholesaler and a retailer’s store, lack of trust, policy of not giving credit to anyone, infrequent visits to the store from the wholesaler.
The community itself plays an important role in deciding whether or not to offer credit, and how much. Wholesalers are 12% more likely to provide business credit to retailers in their own community and give them 8% more credit. Wholesalers are also 14% less likely to experience defaults from retailers in the same community.
In areas lacking formal reporting and resolution systems, an indirect community-driven reciprocity mechanism can complete and allow access to credit. However, there is a very wide range of credits.
For example, a simple loan is one that you can obtain from a popular finance company, bank, or crowdfunding platforms, focused on being paid in the long term. Simple loans can be from 24 months to 7 or 8 years, the vast majority of the loans I grant are without mortgage guarantee. The rates are from 7 to 30% per year. They are also known as SME credit.
The revolving credit, on the other hand, works as “factoring”, credit cards or a line that generates revolving. It is used a lot by companies that generate a lot of inventory and have to renew it. It is also used for short-term projects. This type of credit is 30, 60, 90 and 120 days. In some cases, they are for 180-day credits. It is a credit that does not generate interest if it is not used, it can be used for events and unforeseen events.
Factoring, on the other hand, is a short-term revolving credit of 30, 60, 90 or 120 days where an agreed percentage of an invoice is anticipated and is paid within the agreed term. The guarantee is the collection rights of the invoice. It is an advance that does not pay interest if it is not used. It is very useful for payment or project advances and they are very fast.
The lease, on the other hand, is a rental of a good, machinery and heavy equipment, which is rented for its use within a period of time. 12, 24, 36 or 48 months. You pay very little upfront and you pay very little residual value or final payment in case you want to keep the asset. It is a very agile loan whose collateral asset is the leased asset.
The goods to be leased are generally vehicles and heavy machinery, or yellow machinery. The property can be renewed or not renewed, and it serves as the perfect strategy or commercial ally.
CEO of Zenith, business consulting and development banking.
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