Entrepreneurial Risk-Taking and Business Diversification
Rigid immediate repayment requirements force small business owners to maintain high short-term liquidity, preventing them from extending customer credit, accepting pre-orders, or diversifying inventory types to expand their customer base.
Picture this
When a shopkeeper is forced to pay a landlord every single Monday, she refuses to let trusted neighbors buy flour on store credit or pre-order custom clothes because she needs physical cash in hand every weekend. Removing immediate weekly debt demands allows her to extend credit to customers and stock diverse products, boosting her total long-term store sales.
What the evidence says
Grace period recipients were 11.3 percentage points more likely to sell goods on credit (control mean 43.2%), 10.7 percentage points more likely to accept pre-orders (control mean 39.5%), offered 6.05 additional product/service categories, and exhibited Rs 713.9 higher profit variation between high and low seasons.
- Who
- 769 microfinance clients surveyed three years after loan disbursement in urban Kolkata, India.
- How
- Randomized Controlled Trial measuring long-term microenterprise practices, customer trade credit, custom pre-orders, and product variety across regular and grace period loan arms.
What to do
Structure loan repayment timelines to match the working capital cycle required for micro-entrepreneurs to offer trade credit and product diversification.
From the source
"In the long run (three years after they received their loans) they reported riskier business practices which reflect a greater willingness to reduce their access to liquid funds and experiment with product and client diversification..."
101_290 microfinance and entrepreneurship AER2013.pdf