Financial Services Company (Company Overview)

Executive Summary

Company Overview

Prisma MicroFinance, Inc.'s, Mission Statement:

To provide our customers superior financial services, fostering opportunities for wealth and employment creation, while maximizing social and economic returns for our investors.

The Company

Prisma MicroFinance, Inc. (Prisma) is a United States corporation registered in the state of Massachusetts. The company was founded to be a development bank—making loans in small amounts widely available to people in the developing world. This growing industry is known as "microfinance."

The necessary capital to operate Prisma is raised through private equity and debt from individual and institutional investors in the developed world. With $1.5 million in new equity, the company will be able to support expansion efforts and leverage at least this amount in debt financing. This capital will accelerate growth, exponentially increasing the number of customers and amount lent. Prisma's customers are primarily business owners who do not have access to affordable capital to finance their operations because they are considered unbankable by traditional financial institutions. Although these poor business owners may operate on a very small scale, their operations are profitable. They remain locked in the poverty cycle because of the premium they pay for being perceived as a risky investment. Prisma's experience, and that of the microfinance industry in general, has proven just the opposite. Lending to poor individuals poses risks because of the precarious nature of their cash flows, but providing them access to affordable capital allows them to even out cash flows and break out of the poverty cycle.

Prisma does not conduct its operations for charity. It is at the forefront of the B2-4B revolution—meaning it is finding business solutions for the four million poor people of the world. Companies such as Hewlett-Packard are investing significant capital into this area not only because of the social upshot, but because it is good business. Prisma has operated profitably for five years by targeting a market opportunity that is large, underserved, and in which the competition is fragmented by industry standards. Prisma offers less expensive products to consumers with better service than its competitors.

Company Name

"Prisma" means "prism" in Spanish. Prisma MicroFinance, Inc. "refracts" private capital investment from the developed world, funneling it to small business owners in Central America who traditionally have lacked access to capital but who are entrepreneurial and commercially savvy operators.

Prisma's spectrum covers providing access to credit and financial services for people living in the developing world. The diversity in loan size creates a balanced portfolio serving a range of people. A single loan officer can easily and profitably manage a cost-effective portfolio that includes loans of different sizes. In this way, Prisma embraces its dual business focus of:

• Providing capital to "unbankable" clients
• Ensuring market rate returns for investors

Company History

Prisma was begun in 1995 as a savings and loan cooperative called SINAI, R. L. (Support and Incentives for Autonomous Initiatives) founded by a Nicaraguan, Roger Aburto, and an American, David J. Satterthwaite. They shared a common interest in assisting poor business owners overcome barriers to success. The two founders started operations completely through grassroots efforts with $1,000 in personal start-up capital and a $4,000 loan from American businessman George Kraus, who is now a Board Member. For its first two years, the company conducted its activities out of a single room in Roger's house with a home computer.

Prisma has grown steadily from the beginning, averaging 387 percent annual growth rate as measured by total loan portfolio under management.

Prisma Growth: 1996-2000

The organization's growth has been funded completely with private investment. In December of 2000, the Nicaraguan loan portfolio was at just over $850,000 distributed to 236 loans. The average loan is $3,000 and is repaid within 22 months. Phenomenally, in 1,500 loans, Prisma's default rate is less than 1 percent. The single most limiting factor throughout Prisma's history has been lack of capital. At present, the organization has nearly 200 approved loans waiting for sufficient funds to grant them.

Prisma's first client in 1995, Arroya Rios Vallejos, borrowed $500 for inventory for her corner store. She has since received and repaid four loans, and now owns her own home.

Unlike the overwhelming majority of microfinance institutions that depend on donations, Prisma's entire loan portfolio has instead been financed by debt from individuals and commercial institutions. Prisma has consistently offered interest rates at 31-36 percent APR, significantly lower than the competition's rates of 60-80 percent APR. The company has continually sought to maintain efficient and modern operations, thus creating a vibrant business culture prepared to confront a demanding marketplace.

Products Offered

Prisma is a financial institution. Its principal operations are as a lender to customers typically viewed by the industry as "unbankable." Prisma makes loans, at risk-adjusted market rates, from $50 to $15,000 dollars. This range is often referred to in the lending profession as "microfinance" because of the size of the loans.

All customers require a co-signer and character references for loan approval, creating a circle of trust for lenders. All loans over $500 require guarantees and/or collateral. Interest rates start at 24 percent a year, plus fees. Loan interest rates vary depending on loan size, customers' credit, and other risk factors. Loan terms have ranged from 3 months to 3 years. For the Nicaraguan operations, the median loan term to date from the last 300 loans was 2.4 years.

Prisma has ongoing relationships with customers over the life of the loan. By maintaining contact with customers, early interventions save troubled loans. For example, the company offers customers in good standing (taxi owners in particular) additional working capital lines of credit. This ensures that their business is not disrupted due to cash flow crunches or unexpected occurrences including a car accident, a sick family member, or "inclement weather." Prisma also encourages evening out cash flows by requiring that customers put 5 percent of every loan into a savings account. For first-time borrowers, this amount is folded into the loan amount.

Borrowers in good standing, called class "A" customers, gain more latitude in available credit, which they use to restructure existing loans or get new ones. Customers increase their standard of living as a direct result of these loans.

Loan Products

• Micro Loans ($50-250)—primarily made to low-income individuals for consumer purchases and micro-entrepreneurs for business-related expenses. Micro loans are most often made to women. Business owners buy inventory and consumers purchase domestic appliances, such as refrigerators or stoves.
• Small Loans ($251-1,000)—primarily made to business owners. They purchase inventory and/or capital investments like machinery—freezers, sewing machines, or power tools.
• Medium Loans ($1,001-15,000)—primarily made to taxi owners to purchase new vehicles. These loans assist business owners graduating from small loans and growing owner-operated businesses seeking to expand. Extensive due diligence and more rigorous guarantees are required.

Sources of Revenue

LOAN REVENUE: The revenue stream from a loan is derived from three sources.

1. Interest: A 24 percent annual rate is carried over the term of the loan. This rate is considerably lower than competitors' rates, which average at least 60 percent in the Nicaraguan microfinance industry. This revenue source accounts for 51 percent of Prisma's historical income.
2. Legal Fee: A flat legal fee is charged for the origination of every loan, usually $30, which is carried over the life of the loan.
3. Origination Fee: A 6 percent origination fee is charged that is carried over the life of the loan. This fee accounts for 7 percent of Prisma's historical income.

Additional revenue is derived from:

• Loan Late Payment Charges: Delinquent clients pay an extra 0.5 percent on the late balance. Almost 20 percent of the outstanding loans are assessed a late fee at some point during the life of the loan. But, at any one time, only 5 percent are in arrears. This revenue source accounts for 8 percent of Prisma's historical income.
• Savings Accounts: All clients are required to maintain a savings deposit with a balance of at least 5 percent of the amount borrowed. Prisma provides customers the initial 5 percent required in the loan itself. Savings accounts earn 8 percent annual interest. As this rate is on the high end of the market, the majority of customers carry at least a portion of their savings with Prisma. Savings account volume in Nicaraguan has been 5-10 percent of the total loan portfolio.
• Currency Exchange: Prisma conducts all operations in U.S. dollars because the local economies in which Prisma operates currently, and plans to operate in the future, are less stable. Operations in dollars minimize the currency risk and economic influences on the value of the portfolio. Loans are made and collected in dollars; however, the accounts for subsidiary operations must, by law, be carried on the books of the subsidiary companies in the local currency. On average, currency exchanges accounts for 15 percent of Prisma's historical net income.
• Automobile Insurance: This is a new product offering for Prisma; 50 policies have been sold since March 2000. Although it is a lucrative new offering, income is not realized for a policy sale until the end of the fiscal year. In fact, it is carried on the books as a liability. Offering insurance is a value added for several reasons. One, the company ensures that all cars it finances are insured. Two, competitive advantage lending to taxi drivers provides a captive market for the product. Last, profitably expanding services beyond just lending is a positive entry to offering additional products and services to customers that trust the company.

Target Market

Operations & Management

Growth Strategy & Milestones

Marketing & Sales Strategy

Financial Analysis

Impact Analysis & Social Return on Investment

Appendix