Question

“It is learned that banking institutions are too selective in funding entrepreneurs, especially small, medium, and micro-entrepreneurs. These groups are considered too risky in terms of their loan repayment.”

Based on your study, what are alternative institutions or solutions that can be proposed to support those entrepreneurs and how to avoid the risk mentioned?

Answer 1

One of the emerging alternative institutions and solutions for entrepreneurs, especially small, medium, and micro-entrepreneurs, is coming in the form of financial technology companies (FinTechs). FinTech companies make use of software, algorithms and modern technology to provide and deliver financial services. Banks often shy away from lending to such entrepreneurs because of the fact that the risk associated with such entrepreneurs is very high. In many a cases banks fail to see the business potential of the new idea on which many such entrepreneurial ventures are based.

One point that should be noted here is that FinTechs helps small, medium, and micro-entrepreneurs during the different stages of their financial requirements. An entrepreneurial venture has got the start-up stage, then the survival stage, then the growth stage and lastly the sustenance stage. FinTechs helps such entrepreneurs across all the above mentioned stages and provide them with start-up capital, funds for working capital, and cash flow management.

The FinTechs are in a position to better assess the risks of entrepreneurs especially small, medium, and micro-entrepreneurs. The FinTechs make use of advanced software and algorithms. Many FinTechs also make use of machine learning and big data as well to optimally determine risk levels associated with such entrepreneurs and then devise ways on how to mitigate and best manage these risks.

Besides FinTechs entrepreneurs can also access funding from angel investors, venture capitalists etc. These types of fund providers understand the fact that entrepreneurship ventures are fraught with risk but along with the risk there is the scope and possibility of high returns. If the business idea is a strong one and seems to be viable and feasible then such fund providers will be willing to take the risk and provide funding to the entrepreneur in the hope of getting good returns. Venture capitalists etc. usually take a stake in such ventures and also provide managerial expertise to the ventures to mitigate their risks.