A very common mistake in Microfinance Institutions is to evaluate loans to small companies, as if they were loans to micro companies.
Thus we find that in both cases, payment capacity is measured based on the ratio:
Proposed Credit Fee / Monthly surplus of the economic unit - family.
That is, credit technology, which was born to evaluate micro - businesses (read: small warehouses, market stalls, street vendors, informal, etc.), is transferred to clients that share characteristics with medium-sized companies.
It is forgotten that small companies register a greater scale of operations, either in terms of turnover, number of employees or total assets; just like medium-sized companies.
Therefore, it is insufficient to apply only microfinance technology in the evaluation of small business loans. It must be complemented with the credit technology applicable to non-retail credits (medium-sized company).
The current practice of preparing the client's Financial Statements, based on the information that is gathered in the business, is unreliable, no matter how well the Business Advisor has good intentions. The perspective should not be lost that it is not the same to evaluate a small market stall as a grocery store; also, that it is not lending $.100, but amounts that can exceed $.100,000 (according to the parameters that define small business loans).
Let's not forget that it is common to find errors in the calculation of inventories, as well as an overestimation in the levels of net sales and profitability margins of the business, which distort the customer's ability to pay. Not surprisingly, microfinance institutions are beginning to register higher delinquency ratios in the small business sector.
The appropriate thing would be to request the Financial Statements - RUs from the client and focus the attention of the Business Advisor on his evaluation and contrast of the information indicated, using the microfinance tools.
Another important change is to respect the application of the Generally Accepted Accounting Principles - GAAP and to stop considering Family Expenses within the Profit and Loss Statement and use it as an integral part of a new concept of measuring the ability to pay.
Also, consider only Family Expenses in individuals with businesses and in Individual Limited Liability Companies - EIRL. As long as they do not have a salary assigned within the business.
The new concept of payment measurement, to which I refer, uses as components, in addition to family spending, the monthly Net Cash Flow (FCN).
The monthly FCN is a variant of the annual FCN, used in the evaluation of non-retail loans.
The monthly FCN is the available balance, after covering all costs and expenses; and it is used to measure the customer's ability to pay to assume new financing of fixed assets and working capital (if applicable).
Monthly FCN = Average monthly EBITDA - (A + I)
Where:
Average monthly EBITDA =
(Operating Profit + Depreciation - Income Tax) monthly average
A + I =
Monthly installments of the outstanding loans granted for fixed assets + Average monthly interest of the installments of the outstanding loans granted for working capital
Note:
If the amount of the loan earmarked for working capital exceeds the Net Working Capital (Current Assets - Current Liabilities), the entire installment (capital + interest) must be considered in the calculation of the monthly FCN
What is interesting at this point is that in determining the monthly FCN, the total monthly installments of the loans for working capital are not considered, but only the average financial expenses, unless the debt for working capital (short term and / or greater than 12 months) exceeds the Net Working Capital (Current Assets - Current Liabilities), in which case the full installment will be considered.
The reason why the entire installment is not considered when the amount of the loan requested is less than the Net Working Capital, is due to the fact that the company has Current Assets (merchandise and trade accounts receivable) that are settled month by month. month, enough to cover the amount requested. So it is unnecessary to affect your future flow.
Finally, the new measurement ratio for small business loans would be as follows:
Ratio (Installment / SD) = Proposed Credit Installment / Available Balance
Where:
Available Balance = monthly FCN - Family Expenses
As can be seen, it is the same relationship that is applied in microfinance, but with some variants, such as the replacement of the monthly surplus of the economic-family unit by the Available Balance, which considers the monthly FCN.
The parameters of this indicator will depend on the risk appetite of each Institution.
This definitely calls for a paradigm shift.
