The lack of collateral and the perceived high risk of lending to micro entrepreneurs continue to be major barriers to financing for the Jamaican micro sector, according to JN Small Business Loans Limited (JNSBL).
The statement came from Philip Bernard, General Manager of the company, who was speaking against the background of the recent launch of JNSBL’s “IsupportJamaica.com,” the first crowd-funding web site owned and operated in the English-speaking Caribbean.
The IsupportJamaica.com site, established in partnership with JN Foundation, is being launched in two phases. The site went “live” on the weekend (Saturday July 6), allowing persons to donate to philanthropic projects featured on the site; and by September persons will also have the option of lending funds to entrepreneurs to realise their dreams. Persons who sign up to IsupportJamaica.com, may lend or contribute by using a credit card.
Mr. Bernard said there are some 460,000 micro entrepreneurs in Jamaica and a fifth of them do not have a relationship with a financial institution or bank; and, the lack of access to loans diminishes their ability to contribute to the economy.
“Our surveys reveal that there are some 180,000 micro entrepreneurs who want to acquire funds at reasonable interest rates, and favourable terms of re-payment; however, many do not meet the collateral requirements for loans,” he pointed out, “Because most of them do not have a sufficient asset base; and, many financial institutions are averse to disbursing loans for start-ups, because of the high risk.”
Referencing a recent presentation by Professor Rosalea Hamilton, Immediate Past President of the Micro Small and Medium Enterprise Alliance at a Caribbean Policy Research Institute forum held at The University of the West Indies last month, Mr. Bernard noted that many financial institutions reject good lending prospects due to the lack of information about the businesses.
“Most micro entrepreneurs don’t have reports and comprehensive business plans; therefore minimal data is available for financial institutions to fully understand the scope of their business, hence their applications are often rejected,” Mr. Bernard explained.
He noted that studies have indicated that as high as 90 percent of micro businesses were not registered nor had a business plan, while more than 70 percent did not have audited financial records.
In addition, he said that many micro entrepreneurs also do not own the assets that are traditionally required to secure loans, such as real estate, motor vehicles and savings; and pointed out that the implementation of the soon to be enacted Secured Transactions Act will broaden the collateral requirements to include appliances and business equipment.
“And, the availability of credit scores, through Credit Bureaus operating under the Credit Reporting Act (2008), to financial institutions will also create better opportunities for access to funds for micro entrepreneurs.,” he stated.
However, he maintained that while institutions such as JNSBL accept appliances and business equipment to secure loans, and the new legislations will also create more opportunities to access financing, this does not mean that micro entrepreneurs will not continue to face challenges related to access.
For example, he explained that some entrepreneurs, particularly young people, who have not yet acquired assets to secure loans, may continue to face difficulty obtaining financing. And, a good credit score does not mean financial institutions will lend without collateral.
Pointing to a 2010 study, which was also cited by Professor Hamilton, he said that, “As many as 76 percent of financial institutions are not open to lending entrepreneurs with good credit history if there is evidence of weak cash flow and management in the business. Therefore, we need to create other avenues to lessen the burden on micro entrepreneurs, who have to convince financial institutions that they are not bad risks.”
“There are many entrepreneurs with great ideas who simply need people and organisations who believe in them and are willing to provide support, hence we have established this facility to assist in honing those ideas into successful businesses,” Mr. Bernard maintained.