Microfinance Focus, by Bruce Meraviglia : Unfortunately for most small businesses in the developing world, the levels of venture capital that are available exceed what they can either qualify to receive, or effectively use if it were provided to them; in a growing business, oftentimes too much success (or, in this case, venture capital) can be as deadly as too little success.
 
This, then, is the basis for both this month’s column as well as the theme for the magazine.  That some small businesses have the potential to grow is inevitable when compared to the larger number of small businesses that are funded by the typical MFI.  That these businesses will eventually require more capital than the MFI’s loan limits will support is also inescapable.  As such, two problems must be resolved by the MFI and the growing business:  (1) Will the MFI necessarily lose a valuable client because it cannot change its business model in a way that acknowledges the success of its best customers?; and, (2) Must a growing business choose to limits its potential in order to be able to live within the funding that its MFI is willing to provide?
 
Since very, very few small businesses have the potential, in terms of management capability and revenue potential, to qualify for traditional venture capital investments that may start at US$50,000, or higher, in their country, this is a significant problem.  The businesses cannot acquire the capital they need to support their growth, and the traditional MFI’s have not shown a willingness to support these types of customers.  In the domain of Marketing, this presents a set of opportunities.
 
Since marketing is often tasked with creating new options for the organization it serves, I would like to discuss two classic strategies from the arena of Product Marketing.  The first is the concept of the Product Line Extension, and the second is the concept of the Product Line Expansion.  In a product line extension, an organization will expand its offering by the introduction of a product (or service) that provides a new functionality or capability while remaining consistent with the existing products that are offered.  The organization can forecast the degree of success of this new product among its existing customers based upon their business requirements, the willingness to buy the existing products, and the capabilities the new product offers them.  In the context of the MFI, this might be a line of credit, in the form of a revolving loan, that would be greater than the traditional loans offered by the institution, and that can be accessed as needed by the growing business rather than being taken all at once.
 
The benefit of this type of a product is that the MFI will still view it as a loan, although not one that has a regular, defined payment each week.  The benefit to customer is that the business need not take on the burden (or risk) of borrowing more capital than it needs at given point of time, while having the flexibility of borrowing against a larger loan value than previously offered, as needed.  By extending its offering with this new type of loan product, the MFI retains consistency with its existing loan products, the customer understands the nature of this new type of loan, and the potential size and profitability of the market for this new type of loan can be forecasted by the MFI.
 
An alternative approach would be to create a product line expansion through the introduction of a new type of product that expands the potential class of customers who may be served by the MFI, that is not required to be consistent with the existing products offered, and yet does not commit the MFI to the cost and risk of looking outside of its existing market.  Such a financial product might be a longer term loan, perhaps one with a period of two years, with the payment deferred until the end (a balloon payment of the principal and interest), and at a larger amount than the traditional loan that is repaid weekly.
 
This type of loan product would differ from the existing loan products in that there would not be a consistent, regular payment, and would be a hybrid between the classical loan (in that it would still have to be repaid) while offering the value of an investment (without the MFI incurring the risk of ownership in the customer’s business).  Such a product would create a new class of customers for the MFI, at a reasonable risk and cost, while allowing it to stay within the industry that it understands.
 
The two examples above are fairly basic solutions to a problem that exists, that are easily implemented, and would be understood by both the MFI and the customer.  Whether MFIs implement these two solutions, or choose to create others, they must find a way to continue to serve their best customers as they grow (and prosper), or permanently lose the most profitable customers in whom they have invested time and effort.  In order to solve this problem, the marketing department, which has a primary task of creating opportunities to support the growth of the MFI through the identification of new classes of customers and creating product ideas that will satisfy them, must take the lead, or be relegated to a secondary role as others within the MFI demonstrate the type creativity and innovation that should be Marketing’s purview.