4.1.5. Variable Payment Obligation (VPO)
Variable Payment Obligation programs (VPOs) aim to expand access to finance for Small and Growing Businesses (SGBs) with a type of loan that assesses risk and repayment through variable payments and cash flow, rather than traditional assets – assets that an SGB may or may not be able to provide to a finance provider. This is especially critical for small and medium-sized enterprises (SMEs), especially women-owned or - led businesses, who have trouble accessing the appropriate kind of finance, in part due to the fact that these businesses often lack the collateral that traditional banks request; without this collateral, they are unable to access the credit they need to grow (Source: PACE Initiative Fact Sheet). VPOs allow SMEs to obtain greater access to financing, because “the loan product has soft collateral requirements and a repayment schedule that tracks the business’s cash flow, in contrast to standard loans that often require upfront collateral” (Source: Accelerating Entrepreneurs: Insights from USAID’s Support of Intermediaries).
- Appropriate capital to meet borrower needs
- Cash flow uncertainty
- Off-take risks associated with target sector/region
- Production costs associated with target sector/region
Useful for finance seekers who are unable to provide traditional assets required by providers to secure capital;VPO programs especially benefit businesses with seasonal income (because the payment amount can be variable)
MUST HAVE’S, CRITICAL POINTS, OR QUESTIONS TO CONSIDER
A stabilizing institution, such as USAID, is often needed to mitigate any perceived risks by the traditional bank partner. To further de-risk borrowers in a VPO system, USAID may bundle VPOs with additional business advisory services, as well.
In 2015, Agora Partnerships, Enclude, and Santa Clara University’s Miller Center for Social Entrepreneurship launched the Variable Payment Obligation (VPO) program in partnership with Banco de American Central (BAC) Nicaragua.
USAID and the VPO partnered through the Partnering to Accelerate Entrepreneurship (PACE) Initiative. Through the partnership, each partner has a unique role. Enclude manages the overall program and provides technical support to BAC; Agora provides business development services to loan recipients in Nicaragua; the Miller Center for Social Entrepreneurship developed the initial variable repayment loan product and consults on the program design; and BAC Nicaragua serves as the local partner bank that lends to the entrepreneurs. USAID’s grant, alongside investment from Argidius Foundation, a philanthropic organization, supports the business development services that entrepreneurs receive.
The VPO program aims to distribute variable term loans, up to a maximum of five years, to up to 40 qualified SGBs in its initial pilot phase.Typical loan recipients are women-led or women-owned small- to medium-sized enterprises. As of March 2017, the program pilot in Nicaragua is underway, with nine VPO loans approved, of which four have been disbursed. Borrowers use their VPO loans both for working capital and capital investments. Of those who received a VPO loan, four borrowers had previously received personal loans from banks, MFIs or credit cooperatives – but with interest rates averaging as high as 24%.