In a previous post where I detailed some of the specs of AIDG’s rocket box stove, I mentioned that we would need some creative financing to make it affordable to communities who would most benefit from it. Pete pointed out that we don’t so much need creative financing. The practice of setting up charge accounts for customers, which was more common in the pre-credit card era, could do just fine.
First, a wee bit on the history of credit from Direct Lending Solutions [Credit History: Before there was Plastic…The Earliest Charge Accounts]:
Long before there were credit cards, or even plastic, for that matter, Americans relied on credit, which, for day-to-day matters typically took the form charge accounts with local retailers.
[F]or many retailers, particularly those in rural, farming country or those that were in company towns, without being willing to extend credit through credit and charge accounts, they would not be able to stay in business at all. Credit and charge accounts were mutually beneficial to consumer and retailer, with many retailers having more charge account business than actual cash at the time of sale business.
Because of the more personal nature of the business relationship, repayment schedules tended to vary, according to when the consumer had funds available. A farmer may pay with the yearly sale of crops, whereas a wage worker would pay upon receiving his salary, whether that was weekly or monthly. During hard times, fluctuations of fortune or illness or injury, retailers would often extend credit to tide a trustworthy, longtime customer through, even though payments were sporadic or widely spaced. It was one of the advantages that this local, more personal system had.
Given that a lot of XelaTeco’s customer base are farmers or member’s of cooperatives, this strategy of extending line of credit to customers makes a lot of sense financially. Here’s why:
- Community members are really interested in buying the rocket box stoves, but can’t pay the full cost out of pocket.
- XelaTeco can’t lower the price of the stoves any further or they won’t be profitable.
- Microfinance options in Guatemala seem to favor entrepreneurs buying items that will make money and not individuals buying consumer products that will save them money.
- There are not many other types of financing available to the XT’s customer base even though they may be a safe bet. FENACOAC offers a ‘community lending’ option of up to 1000Q per person if a group is already organized into an association/cooperative. However some community members are concerned that the payments/interest rates would be higher than they could manage.
Here is an outline of a pilot plan that we’re working out with a women’s weaver’s association at San Alfonso, one of our community partners, and XelaTeco.
- Clients organize into a group to buy stoves in bulk, then pay a percentage of the full cost to XelaTeco up front. In the case of San Alfonso, the women from the cooperative agreed to a 50% down-payment.
- XelaTeco extends a line of credit to the community effectively giving the community a no-interest loan. *** Caveat: This is a pilot. We’ve made it very clear to the community that this is a pilot and that the terms (interest rates, payment period, etc.) will mostly like be different for future buyers.***
- Community members pay XelaTeco back over a pre-determined period of time. We agreed that 10 months was doable for them. The women decided they could manage the payments amongst themselves and would make a single joint payment each month to a pre-specified account. This is particularly important as XelaTeco doesn’t have the manpower to chase down a lot of individuals if they fail to pay.
- If someone fails to pay 2 payments in a row without good reason [e.g. illness, bad harvest, natural disaster, etc.], XT will return to the community and retrieve the stove. This idea came from the community itself, so we’re confident that there will be enough peer pressure/communal spirit within the group that this shouldn’t have to happen.
Wish us luck.