One of the biggest hurdles in implementing a financing program is determining who to lend to and leads to the all-important question:
How can you reliably determine who will pay you back?
To answer this, it is important to understand the factors that can affect repayment for a customer. We divide these factors into 2 main categories: Ability to Pay and Willingness to Pay. While it may seem over simplified, nearly all loan default can be traced back to one of these two elements, so a thorough understanding of these will go a long way in determining the individual factors that can contribute to successful loan repayment.
Ability to Pay:
This category refers to the indicators that determine whether a customer will be able to repay a loan. In this category are things like a customer’s income vs. their expenses (Do they make enough money to afford the loan payments?) and an understanding of the risks that may lead to non-payment (Are there environmental, cultural or political risks that could cause this person to not be able to afford their payment?).
Axios Impact Investments works primarily with agricultural products. Our model focuses on only financing products that have been demonstrated to substantially increase a farmer’s income. We know that if a farmer successfully utilizes one of the products we finance, their income will increase such that the loan repayment will not be a burden for them. In this way, we can be confident in the farmer’s “ability” to repay a loan.
Another way we ensure ability to pay is to structure the loan repayment around a specific harvest schedule. A farmer cannot typically make weekly payments if they only get paid once or twice a year at harvest so we structure our loans to increase their ability to pay, by aligning payments with the realities of the agriculture space.
Willingness to Pay:
The other category which is oftentimes much harder to determine is whether a person is willing to repay you, regardless of their ability to do so. This is basically making a determination on the character of a potential borrower, combined with the social and regulatory systems in place to help enforce their committment . There are many different theories on how to judge a person’s willingness to pay and some pretty intriguing models out there that we’ll discuss in a later post. In general, good indicators include their prior borrowing history, their community involvement, willingness to put forward a down payment, and references who can speak to a borrower’s character.
Keeping these two categories in mind throughout the entire loan process is critical to a successful financing program. Just because someone is willing to pay does not mean they necessarily will be able to. And on the flip side, just because someone is able to pay does not mean they will be willing to do so. We oftentimes see applications that address one or the other of these categories, but to be able to adequately analyze a potential borrower, it is important to assess both their willingness and ability to pay.
Are you interested in determining the willingness and ability of your customers to repay? Review our Partner with Us! page for more information.