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LESSON 1: INTRODUCTION AND of its microfinance initiatives on OVERVIEW OF MICROFINANCE increasing the scale and scope of microfinance in the country, MICROFINANCE HISTORY...

LESSON 1: INTRODUCTION AND of its microfinance initiatives on OVERVIEW OF MICROFINANCE increasing the scale and scope of microfinance in the country, MICROFINANCE HISTORY specifically within the banking sector. Microfinance started in 1973 with In 2008, the microfinance industry very small loans. saw continuous growth and dynamism with the backdrop of an It started in Brazil when an enabling policy and regulatory antipoverty called Accion noticed environment. New players, a wider that small, informal enterprise range of products and services, needed fund to expand their technological innovations and business. applications have driven much of the microfinance developments in the In local history, Microfinance in the country. Philippines began in 1900s. In 2009, the First Annual Global In 1952, Rural Banks is the dominant Microfinance Index and Study provider of commercial micro and declared the Philippines as the best small-scale financial services in the world in terms of its microfinance regulatory framework. During 1980s, the number of Overall, the Philippines ranked third microfinance NGOs has steadily in the world following the increased microfinance leaders, Peru and Bolivia. Microfinance in the Philippines evolved in mid- 1996 and continued In 2010, the Economist Intelligence until the end of 1999 Unit (EIU), in its “Global Microscope on the Microfinance Business In 2000, the BSP (Bangko Sentral Environment”, ranked the Philippine ng Pilipinas) was mandated by the regulatory environment for General Banking Law to recognize microfinance as the best among 54 microfinance as a legitimate banking countries in the world. In terms of activity and to set rules and overall microfinance business regulations for its practice within the environment, the Philippines moved banking sector. It was also the same up the rank, occupying the number year, the BSP declared microfinance two position in 2010, from being as its flagship programme for poverty number three in 2009. The EIU cited alleviation. the BSP’s regulations that expand the range of microfinance products that In 2005, the United Nations declared banks can offer to their clients as the as International Year of Microcredit main reason for the upward ranking to highlight the role of microfinance in of the Philippines. This citation poverty alleviation and economic affirms that the BSP’s regulatory development. Through BSP’s approach and initiatives in advocacy, 2005 was also declared as microfinance and financial inclusion the Philippine Year for Microfinance are making an impact, and are truly through Presidential Proclamation benefiting the microfinance market. 719 and Senate Resolution 124 In 2011, there was mainstreaming of In 2006, the BSP focused its financial inclusion in the domestic microfinance initiatives on increasing and international policy agendas, in the scale and scope of microfinance light of growing recognition of the in the country, specifically within the importance of financial inclusion as a banking sector. policy objective. Along with this, the Philippine Development Plan (PDP In 2007, the microfinance industry 2011-2016) laid out its vision for the was characterised by innovation, financial sector as a “regionally dynamism and continued growth. The responsive, development-oriented BSP remained responsive to these and inclusive financial system which changes while maintaining the focus  provides for the evolving needs of its loans backed by the borrowers’ diverse public”. character rather than collaterals. MICROCREDIT AND MICROFINANCE MICROFINANCE DEFINITION - MICROCREDIT is a part of the field - According to Investopedia, of microfinance. Microcredit is the MICROFINANCE is a financial provision of credit services to services provided to unemployed or low-income entrepreneurs, while low-income individuals or groups who lack access to conventional banking - MICROFINANCE includes credit, services. savings and increasingly additional - Microfinance aims at filling this gap financial services such as insurance and give access to financial services and money transfer. such as savings, credit, insurance and money transfer to people that otherwise would remain unserved. - Microfinance institutions (MFIs) deliver basic financial services to poor and low income people, or microentrepeneurs, with little or no access to the formal financial system. MFIs developed specific products and methodologies to overcome the shortfall of collaterals of clients and therefore make them eligible to get loans and other financial services. MICROCREDIT AND MICROFINANCE Who are the clients of microfinance? MICROENTREPRENEURS FINANCIAL SUSTAINABILITY - Microentrepreneurs, or economically To carry on business, financial active poor, are business people who institutions and in general all through microfinance take advantage corporations, need the necessary of economic opportunities that funds. These can be raised in several otherwise would remain unmatched different ways: they can issue shares due to financial constraints. Debt financing - Credit is given to support Banks can then collect savings from “microbusinesses”, allowing their clients. low-income people to respond to Additional resources can come from economic opportunities. donations, grants or soft loans MICROFINANCE AND MONEYLENDERS - Moneylenders are the more direct MICROFINANCE AND BANKS competitors of MFIs. Poor people, excluded from the formal financial - The relative importance of the different system, most of the time have the sources differs between different financial only alternative of this kind of institutions. Financial NGOs typically rely informal sources of funds. on donor subsidies and are not allowed to collect savings, while commercial banks - Positive features: Simple procedures, rely on their own sources of funds, clear terms, timely disbursement and deposits of the clients (savings) and  equity capital. Collecting savings is traditional lending institutions for the generally forbidden to NGOs as a special following reasons: banking license is needed in order to protect savers in case of the institution’s MFOs are on average smaller than default. At present, the main sources of traditional banks funds for MFIs are charities, governments In general, MFOs make shorter-term and international organizations. Most loans than traditional banks MFIs rely heavily on donor support and MFOs make smaller loans than are not financially viable. traditional banks Many MFOs are relatively new organizations Many MFOs are growing rapidly Dual Goal: FINANCIAL VIABILITY & OUTREACH TO THE POOR. What is MFI? - MFI (Microfinance Institutions) is a microfinance organization that provides the microcredit and financial services to microentrepreneurs and those who are self-employed. Are all MFIs non-profit? IMPORTANCE OF MICROFINANCE - Many MFIs began as a non-profits, however, a for-profit sector has 1. Provides access to financial services developed more recently. For-profit 2. Allows people to better provide for MFIs have drawn on large their families investments which allow them to 3. Provides access to credit distribute more funds by (at times) 4. Serves groups often overlooked in more efficient means. society 5. Offers a better overall loan repayment Here are some of the most prominent model global MFIs and organizations furthering 6. Creates opportunities to end the cycle the mission of microfinance: of poverty ➔ BRAC is the largest MFI in the world LESSON 2: THE ROOTS OF aiding 126 million people with its MICROFINANCE AND non-profit services. BRAC, is an ORGANIZATIONAL EFFICIENCY international development- organization based in Bangladesh, In 1. Key Factors that Affect the efficiency order to receive foreign donations, of a BRAC was subsequently registered 2. lending institution under the NGO Affairs Bureau of the 3. The size of the institution Government of Bangladesh. BRAC 4. The rotation of the loan portfolio is the largest non-governmental 5. The size of the average loan development organization in the 6. The maturity of the institution world, in terms of number of 7. The growth rate of the institution employees as of September 2016. Established by Sir Fazle Hasan Abed What is MFO? in 1972 after the independence of Bangladesh, BRAC is present in all MICROFINANCE ORGANIZATION provides 64 districts of Bangladesh as well as mall loans and financial services, poor 11 other countries in Asia,Africa, and self-employed people or individual. the US. Given the efficiency characteristics above, ➔ 51Give Founded in 2007 in Beijing, MFOs may appear inefficient compared to 51Give provides microfinance  solution services for other MFIs. The provides interest-free financing for organization offers an e-commerce small businesses, education and platform that offers both online and health services such as clean water. mobile technology designed to As of 2020, Kiva has extended more connect individuals, companies, than $1.4 billion in microloans to 3.5 organizations and institutions with million borrowers, and has a network local MFIs, thus facilitating donations, of approximately 1.8 million lenders investments and the delivery of and approximately two million microfinancing services. As of 2020, borrowers. 51Give's platform was being used by more than 100 charitable ➔ Compartamos Banco is based in organizations. Mexico and is most known for its success after converting from a ➔ Bank Raykat Indonesia is the oldest non-profit to a for profit. Its share Indonesian bank, founded in 1896 in price increased 22% in the first day of Jakarta, and has established itself as trading. However, the bank has one the country's largest financial received criticism surrounding the institutions, while operating primarily extreme profitability of the company as a small-scale and microfinance and its interest rates of up to 90%. lender, with more than 30 million retail banking clients conducting ➔ Truelift is designed to rate how well business with the bank through an MFI serves those living in poverty. thousands of branches and rural They give their ‘Pro-Poor Seal of service posts throughout southeast Excellence’ to MFIs who meet their Asia. Bank Raykat Indonesia is standards. It is a global initiative to 56.75% government-owned. push for accountability in pro-poor development. Truelift is a trust mark – ➔ Grameen Bank Grameen Bank, in microfinance and other forms of founded in Bangladesh in 1983, social business – to signify holds the distinction of being a Nobel commitment to positive and enduring Peace Prize-winning MFI. It change for people affected by originated as a result of the work of conditions of poverty. its founder, Muhammad Yunus, whose research pioneered the ➔ Cerise is a network for MFIs to share concept of providing micro-banking and learn from one another. CERISE services and non-collateralized loans is a non-profit service provider based for the poor in order to alleviate in Paris. What they offer is unique: poverty. As of 2020, Grameen Bank training and support to institutions big has more than nine million borrowers and small to carry out social audits, and a loan portfolio in excess of $20 analyze social data and define their billion. In addition to providing social strategy. microcredit and other banking services, the bank also has a LESSON 3: MICROFINANCE AS AN low-cost housing program that won a INDUSTRY World Habitat award in 1998. In 2008, Grameen also extended HOW BIG IS MICROFINANCE? operations to the United States. Microfinance specifically offers services to those who don’t have ➔ Kiva Founded in 2005 and adequate credit or who are otherwise headquartered in San Francisco, “unbanked”, meaning they do not Kiva Microfunds is a nonprofit MFI have access the services of a that operates in the United States traditional financial institution like a and more than 80 other countries bank. worldwide. Kiva's operational method This may be because they lack the for providing microfinance lending is assets needed to get a loan, are through establishing a crowdfunding, deemed too poor to merit targeting, or peer-to-peer (P2P) lending, or live in a remote area where there platform that allows individuals to are no financial institutions. lend directly to borrowers in other Microfinance exists all over the world countries who lack access to (including in the United States), but is traditional financing sources. Kiva  focused on the developing world due obtain funding from other lending to poorer populations and lesser sources due to lack of credit or penetration of traditional banks. limited business development experience. The microbusinesses Gender-Based Obstacles in Microfinance must be located in rural areas and Microenterprise defined as any area other than a city or town that has a population of greater than 50,000 and the urbanized area contiguous and adjacent to such a city or town according to the latest decennial census. As a rural sole proprietorship or business with less than ten employees POVERTY PYRAMID HOW BIG IS MICROFINANCE ROSCAs- Rotating savings and credit Why do poor need financial services? associations Lifecyle Needs: such as weddings, ASCAs- Accumulating savings and credit funerals, childbirth, education, associations homebuilding, old age. SACCOs- Savings and credit Personal Emergencies: such as cooperatives sickness, injury, unemployment, theft, NGO- Non Governmental Organization harassment or death. WHO USES IT? Disasters: such as fires, floods, cyclones and made events like war. ❖ Low income individuals Investment Opportunities: expanding - This is equivalent to a monthly a business, buying land or indicative income between PhP equipment, improving housing, etc. 19,040 and PhP 114,240. The lower income class comprises those with How can microfinance assist the poor? per capita incomes below twice the Microfinance can help increase poverty line, while the upper income income class has per capita incomes in Build viable businesses excess of twelve times the poverty Reduce vulnerability line. – pidswebs.pids.gov.ph The Empower the client government defines the middle class And improve the quality of their lives. as those earning incomes between two to 12 times the poverty line. This Who are the providers of the means if your family income is microfinance services? between around PHP 21,000 and 1. Non-governmental organizations PHP 125,000, you fall in the (NGOs) -Often small and dependent middle-income class. on donors. NGO’s are typically ❖ Rural/Rural Microenterprise non-profit organizations, community - These potential borrowers are groups, church-affiliated programs, required to show that they cannot  and so on that are not regulated by a MICROFINANCE AND FINANCIAL government banking authority. INCLUSION 2. Member-owned cooperatives take many forms, such as credit unions, The World Bank defines financial inclusion village banks, or self-help groups, but as the accessibility of financial services and generally provide services only to products to meet the diverse needs of their members; regulations on individuals and businesses alike. In this cooperatives vary widely by country. regard, the said organization has been 3. Nonbank financial institutions are advocating for financial access as a means similar to banks but are classified to reduce poverty and promote shared under a different type of license. A prosperity. What does this mean? Financial government banking agency also access refers to having an account that typically supervises them. They allows an individual to perform financial usually have lower requirements in transactions. This is regarded as the first terms of how much capital they must step towards inclusion as it opens up have, and are limited in what types of account holders to the various financial services they can offer. services available to them which they can 4. Rural banks and agricultural use to improve their quality of life. development banks are regulated banks that operate in nonurban areas THREE ELEMENTS CONSIDERED: and focus mainly on the agricultural sector. 1. ACCESS - This is seen by how accessible 5. State-owned banks, including postal finance service providers and their products banks -Most were started as are to the public. government-owned banks or private banks with heavy government 2. USAGE - This refers to the patterns of use subsidization. Purely state-owned by the survey respondents of financial banks are similar to the banks most services. of us normally think of, but are owned by the government. 3. QUALITY - This factor pertains to 6. Commercial banks are the consumer experience – that is, the attitudes supervised for-profit banks with which people have towards financial services which most of us are generally familiar. affect usage. LESSON 4: KEY PRINCIPLES OF IMPACT OF MICROFINANCE ON MICROFINANCE AND MICROFINANCE FINANCIAL INCLUSION PRODUCTS It is difficult to quantify the effect of KEY PRINCIPLES OF MICROFINANCE microfinance on financial inclusion among Filipinos. However, it is easy to see how this 1. The poor need a variety of financial sector promotes it. Although the number of services, not just loans people with financial access is steadily 2. Microfinance is a powerful instrument increasing, many are still left behind, and against poverty majority of them are from the vulnerable 3. Microfinance means building financial sector. Microfinance plays a major role in systems that serve the poor bridging the gap because MFIs usually target 4. Financial sustainability is necessary to this part of the population – in particular, reach significant numbers of poor people 5. low-income individuals engaged in Microfinance is about building permanent entrepreneurial activities. And naturally, the local financial institutions more that people take advantage of 6. Microcredit is not always the answer microfinance services, the higher the 7. Interest rate ceiling can damage poor percentage of Filipinos having financial people’s access to financial services access. And as we have seen earlier, an 8. The government’s role is an enabler, not increase in access and usage means a as a direct provider of financial services better state of financial inclusion. 9. Donor subsidies should complement, not compete with private sector capital BENEFITS OF MICROFINANCE 10. The lack of institutional and human capacity is the key constraint. Provides access to economic services to untapped sectors  Aids in poverty alleviation SAVINGS Encourages entrepreneurship MFIs typically offer two types of savings Helps stabilize income flow for accounts: voluntary and forced. Voluntary borrowers savings replicate the savings services provided by traditional commercial banks Promotes asset-building while forced savings serve as collateral for Promotes financial inclusion the loan. These accounts do not necessarily provide a return on deposit and are kept by GENERAL FEATURES OF A the institution until the balance of the loan MICROFINANCE LOAN has been paid off. Minimal application requirements Unsecured Frequent amortization Repayments based on cash flow Additional support Low loanable amount LOANS The success of many MFIs can be identified in their ability to combine successful practices from the informal sector (moneylenders) into formal institutions. These include flexibility, fast access to funds, clear and easy conditions. The extraordinary success of microcredit comes from its ability to replicate some of these features from MICROINSURANCE moneylenders into more “formal” financial institutions lowering the interest rates Low-income entrepreneurs, just like anyone applied. else, are vulnerable to risks, such as illness, injury, theft, death, accidents and flood. This Specific features that microfinance is why financial products to mitigate the institutions should implement to deliver effects of these risks are valuable for them. valuable services for their clients are listed below. Insurance is a financial service that some MFIs are starting to add to their portfolio to 1. Fast access respond to this need of protection. Providing 2. Clear , easy and flexible conditions savings and insurance services besides 3. Permanent services credit make the MFI a full service 4. Alternative collaterals and collateral financial institution delivering microfinance, substitutes i.e. a full set of financial MICROFINANCE PRODUCTS services to low income people. Financial products of microfinance used to be limited to savings and credit. Several MONEY TRANSFER financial services have sprung up in the past decade to address the other financial Money transfer service is another critical services needs of microfinance clients like financial service: the business of insurance, remittance and even housing remittances, i.e. the money that emigrants services. send home to relatives, is growing strongly and is often managed by informal Loans that are up to PhP150,000 used for arrangements with high charges and high consumption or productive purposes are risks. classified as microfinance loans as stated in government’s Social Reform Agenda or Depending on the local regulation and costs Republic Act 8425 of 1997. The this service can be delivered directly or in same amount is set as the maximum partnership with money transfer companies. capitalization for microenterprises. MFIs owns the competitive advantage of the relationship with their clients and such service can also be linked to other products Because they are an aggregate of so or can be taken into account when many factors, profitability indicators calculating the repayment capacity of each can be difficult to interpret. The fact client that an MFI has a high return on equity says little about why that is so. LESSON 5: INDICATORS OF All performance indicators tend to be MICROFINANCE AND FINANCIAL of limited use (in fact, they can be LITERACY outright misleading) if looked at in isolation and this is particularly the IADB (INTER-AMERICAN DEVELOPMENT case for profitability indicators. BANK) FOUR MAIN CATEGORIES: 1. Portfolio Quality ADVANTAGES OF MICROFINANCE 2. Efficiency and Productivity ❖ Better access to credit 3. Financial Management ❖ Customer Friendly Terms and Rates 4. Profitability ❖ Better Quality of Life PORTFOLIO QUALITY DISADVANTAGES OF MICROFINANCE - is a crucial area of analysis, since the ❖ These microfinance firms do not have largest source of risk for any financial the wherewithal to support such large institution resides in its loan portfolio. operations. The loan portfolio is by far an MFI’s ❖ Grouping borrowers together for largest asset and, in addition, the repayment may address the situation quality of that asset and therefore, to some extent. the risk it poses for the institution can ❖ There are also reports of some scam be quite difficult to measure. For and forceful fund recovery by some microfinance institutions, whose players loans are typically not backed by bankable collateral, the quality of the PRIMARY OF GOALS OF MICROFINANCE portfolio is absolutely crucial. Breadth of Outreach (how many people served) EFFICIENCY AND PRODUCTIVITY Depth of Outreach (how poor are INDICATORS people served) - are performance measures that show Length of Outreach (serving people how well the institution is streamlining for many years) its operations. Productivity indicators Positive Impact (long-lasting and reflect the amount of output per unit substantive) of input, while efficiency indicators also take into account the cost of the VISION OF MICROFINANCE inputs and/or the price of outputs Providing many poor families with access to affordable financial FINANCIAL MANAGEMENT services. - Financial management assures that Creating indigenous sustainable there is enough liquidity to meet an institutions that can meet the long- MFI’s obligations to disburse loans to term financial needs of their its borrowers and to repay loans to its communities. creditors. Even though financial Improving social conditions—better management is a back office health, sanitation, nutrition, function, decisions in this area can education. directly affect the bottom line of the institution. Financial management 6 TYPES OF SHORT-TERM FINANCING can also have a decisive impact on 1. Trade Credit profitability through the skill with 2. Family & Friends which liquid funds are invested 3. Commercial Banks 4. Factoring Accounts Receivable PROFITABILITY MEASURES 5. Commercial Paper - Profitability measures, such as 6. Credit Cards return on equity and return on assets, tend to summarize performance in all 1. TRADE CREDIT - Buying goods or areas of the company. If portfolio services immediately and paying for quality is poor or efficiency is low, this them later. Note: What if it’s not good will be reflected in profitability.  credit? The credit supplier might GROUP VS INDIVIDUAL LIABILITY FOR require a PROMISSORY NOTE. MICROFINANCE BORROWERS IN THE 2. FAMILY AND FRIENDS - It is very PHILIPPINES – IPA (INNOVATIONS FOR important to: POVERTY ACTION) Agree to loan terms Put it in writing Arrange repayment plan 3. COMMERCIAL BANKS – Short term loans Secured Loan Unsecured Loan Line of Credit Revolving Credit Agreement If unable to secure a loan from a bank, a business may go to a Commercial Finance Companies 4. FACTORING ACCOUNTS RECEIVABLE - Selling accounts receivable for cash. 5. COMMERCIAL PAPER An unsecured promissory note ADVANTAGES OF MICROFINANCE Due is less than 270 days GROUP LENDING Only an option for large 1. Help financially corporations with fantastic 2. Helping their businesses credit ratings 3. Women’s Empowerment 6. CREDIT CARD 4. Social Affair A readily available line of credit DISADVANTAGES OF MICROFINANCE Risky and have high interest GROUP LENDING rates 1. Paying for someone else 2. Group attrition INDICATORS OF FINANCIAL LITERACY 3. Differences in abilities and knowledge level GROUP LENDING - Group lending is a unique financial MICROSAVINGS service for low-income - Micro savings is a branch of entrepreneurs. To obtain such a loan microfinance, consisting of a small it is necessary to form a group of deposit account offered to three or more individuals who run lower-income families or individuals businesses that earn income and as an incentive to store funds for have been active for at least three future use. Micro savings accounts months. Group members guarantee work similar to a normal savings each other’s loan repayment, which account, however, are designed is why collateral is not necessary. around smaller amounts of money. - Groups provide additional or The minimum balance requirements alternative forms of security, as are often waived, or very low, repayment of loans is a joint liability. allowing users to save small amounts This works because group reputation of money and not be charged for the is at stake and future access to credit service. for members depends on individuals paying off their loans. Social pressure TWO (2) TYPES OF SAVINGS is brought to bear on individual borrowers by members of the group I. COMPULSARY SAVINGS - those ensuring they pay for their loans. This that individuals and institutions are is invaluable as a credit control compelled to make as per mechanism. government rules. Savings payments  that are required as part of loan post offices, banks, LIC, Chit finds, terms or as a requirement for shares, mutual funds and other such membership, usually in a credit institutions. The rates of interest are union, cooperative, microfinance different in various institutions. It is institution, and village bank or generally fixed according to the time savings group. Compulsory savings period of the deposited amount. are often required in place of Interest rate varies from time to time. collateral. EXAMPLES: SHORT-TERM FINANCING 1. Provident Fund - Short term financing means the 2. Schemes Pension Schemes financing of business from short term sources which are for a period of less PROVIDENT FUND than one year and the same helps THREE TYPES OF PROVIDENT FUND the company in generating cash for working of the business and for A. GENERAL PROVIDENT FUND - operating expenses which is usually This is a compulsory deposit or for a smaller amount and it involves deduction scheme made by the generating cash by online loans, lines government servants. The employee of credit, invoice financing. It is also can deduct minimum 10% of his referred to as working capital basic pay or more to G.P.F. account financing and is used for inventory, in every month. Specific G.P.F. receivables, etc. Account No. is given to each employee by the government. In this SHORT-TERM FINANCING: deposit 8% interest is given annually. Creating Objectives Loan can also be given to the Short-term financial objectives are created depositor if he requires for specific based on the desires or goals of the type of expenditure like marriage company or individual who wish to make a ceremonies, other ceremonies, plan. house building and repairing etc. These loans are refundable and Short-term objectives are those that can be non-refundable. completed within a shorter period. Some B. EMPLOYEES PROVIDENT FUND - short-term objectives are obtained within a This is a type of compulsory saving day or week, while others are completed by the non-government, within a month. There is no one main semi-government and company objective for short-term financial planning, as workers. In this scheme the the goals and needs depend on the employee contributes certain individual person or business creating the percentage (10-12%) of his income in plan every month and the matching amount is to be deposited against the IMPORTANCE OF FINANCIAL employee’s account number by the OBJECTIVES employer or companies. C. CONTRIBUTORY PENSION Short-term financial objectives are important, SCHEME - This is a type of deposit because they help create a plan the or pension scheme like G.P.F. for new business or individual can follow. Financial entrants in the State Government objectives also require the planner to Service with effect from the date address financial issues, such as balancing 01.01.2005. Government of India budgets and ensuring financial research and introduced this new restructured resources are available. defined Contribution Pension Scheme to the Central Government TYPES OF SHORT-TERM FINANCING BY Service with effect from January WALL STREET MOJO 2004. This scheme is implemented by Ministry of Finance (Department of 1. TRADE CREDIT - This is the floating time Economic Affairs). allowed the business to pay for the goods or services which they have purchased or II. VOLUNTARY SAVINGS - Voluntary received. savings can be done as per the 2. WORKING CAPITAL LOANS - Banks or needs and requirement of the other financial institutions extend loans for a families. Money can be deposited in shorter period after studying the business nature, its working capital cycle, past records, etc. 3. INVOICE DISCOUNTING - It refers to arranging the funds against the submission of invoices whose payments are to be received in the near future. 4. FACTORING - It is debtor finance in which business sells their accounts receivable to a third party whom we call factor at a rate which is lower than the net realizable value. 5. BUSINESS LINE OF CREDIT - The business can approach the bank for approval of a certain amount based on their credit line structure judged through a credit score, a model of business, projected inflows. ADVANTAGES OF SHORT-TERM LOANS 1. LESS INTEREST 2. DISBURSED QUICKLY 3. LESS DOCUMENTATION DISADVANTAGES OF SHORT-TERM LOANS The main disadvantage of the short-term finance is that one can get a smaller amount of loan only and that too with shorter maturity date so that the borrower won’t get burdened with bigger installments. It is fixed that the period of loan will be less than 1 year and if a high amount of loan is sanctioned, the monthly installment will come very high resulting in an increase in the chance of default in repayment of loan which will affect the credit score adversely.