TB0483

David Befus
Robert Grosse

Sustainable Finance for Small and Medium-Sized

Enterprises in an Emerging Market

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(2 Bridges for Economic Growth in Honduras)
Sitting in his office in Tegucigalpa, Honduras, one winter day in 2013, Roberto Gómez was wondering if the
effort was worth it. He had just completed more than a year of hard work to launch an SME financing venture,
2 Bridges for Growth. The program was designed to link small and medium-sized companies in Honduras with
financial institutions (Bridge #1) and alternatively with venture capital investors (Bridge #2). The program was

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supported by a foundation grant, and now was at the point of cutting the umbilical cord of external support to
begin operating independently.

Gómez was questioning the viability of this service that he had created. The initial phase provided a link
between good-quality companies that previously had limited or no access to bank financing, and a group of
commercial banks operating in Honduras that had committed themselves to serving the SME (small and medium-
sized enterprise) segment of the overall market. A second link extended to investors who might be interested in
putting their own money into a fund that in turn would invest in minority ownership of SMEs in Honduras.
In every case, the investment or the loan size was intended to be in the range of $US 20,000–250,000 in total.
Did he have a business model that could survive the pressures of meeting payroll and generating an adequate
return to lenders and investors? The results had been impressive up to now, and the puzzle was how to create a
sustainable design for the long term.

The program launched with the support of the Argidius Foundation in Switzerland. This foundation was
specifically interested in seeing if sustainable financing of SMEs would be possible in emerging markets in Central
America and Africa. With an initial grant of $US 150,000 to be used in an 18-month period, Roberto Gómez
put together a team of five people and began the effort in Honduras to identify attractive financing candidates
among the SMEs there, and to find financial institutions interested in lending to them. He also began to explore
the possibility of launching a venture fund that would invest in these SMEs, with the intent, in all cases, of taking
a minority position in the firms and offering “angel” support to them in their business activities.1

The Honduran Context

Honduras is one of the poorest countries in the world, with an annual per capita income of $US 2,291 in 2013,
and with approximately two-thirds of its eight million population living in poverty (as defined by the World
Bank). Hondurans engage in a wide variety of economic activities ranging from agriculture (14% of GDP) to
manufacturing (28% of GDP) and services (58% of GDP). The informal sector is estimated to be well over half
of the total economy, and thus not accurately measured.

The country is nestled between Guatemala to the north and Nicaragua to the south, with coasts on the
Caribbean Sea and the Pacific Ocean (see Exhibit 1).

With the increase in cocaine trafficking coming north from Bolivia, Peru, and Colombia to the United States
over the years, the route that formerly went through the Caribbean into Florida shifted to Central America and
Mexico into Texas and the western U.S. over the past two decades so that drug-related violence is now a major
problem in Honduras. The country had more murders per capita than any other country in the world during

Copyright © 2017 Thunderbird School of Global Management, a unit of the Arizona State University Knowledge Enterprise. This
case was written by Professors David Befus and Robert Grosse for the sole purpose of providing material for class discussion. It
is not intended to illustrate either effective or ineffective handling of a managerial situation. Any reproduction, in any form, of the
material in this case is prohibited unless permission is obtained from the copyright holder.
 Exhibit 1. Honduras and Neighboring Countries

2009-2013. This factor, along with the poverty and some degree of political instability, has made Honduras a
difficult environment in which to pursue economic development.

The government, international agencies, and business recognized that jobs creation was one of Honduras’
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greatest needs; perhaps for this reason in 2013, there were 83 microfinance organizations in the country. However,
the focus of these agencies fundamentally was on providing very small amounts of capital to poor people. While
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this was helpful for subsistence, it did not seem to make much of an impact on the economy as a whole.

Though many microfinance institutions (MFIs) present the concept of growing microenterprises into
small businesses through their programs, Gómez discovered that this was not a central part of any MFI that he
encountered. Such agencies generally did away with training programs due to their costs, and when some clients
grew their businesses, the MFIs often attempted to keep them as clients as long as possible, since this was a
great source of revenue: a good return with very little cost. In the meantime, the MFI sector demonstrated little
impact beyond their direct clients, who used their small loans for survival and consumption through marginal
economic activities.2

For everyone interested in economic development, the idea of supporting the growth and development
of SMEs in Honduras was a logical choice. Academic research suggested that this was the sector that should
be promoted. For example, University of Michigan professor Aneel Karnani presented a devastating critique of
microcredit in his book, Fighting Poverty Together, which included a chapter titled “Microcredit Misses Its Mark.”
He also advocated the SME sector as the alternative, since “[it] is the major creator of employment.”3

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Start-up of the Program
In October 2012, the 2 Bridges program was launched. Two months prior to that, a recruiting effort had brought
a dozen candidates to be interviewed for a position as the local representative of 2 Bridges. The principals met
with these candidates and then launched the program by taking the selected candidate to visit several banks and
SMEs that were likely potential clients. The representative began working in October, based in the offices of
a local NGO that operated a variety of programs for Honduran micro-, small, and medium-sized enterprises.

The entire project team included two U.S. finance professors with extensive experience in banking and

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microfinance in Latin America, one specialist in training in Latin America, and one Spanish-speaking office
manager, plus the local representative. A grant from the Argidius Foundation covered the cost of their work on
the project for 18 months, including trips to Honduras for the four people not based there.

Since the program was new and unknown in the local environment, the program team undertook a series of
visits to banks, microenterprise finance institutions, government agencies, and firms in the target SME group. The
process of informing the local market about the presence of this new facilitator in the attempt to extend greater

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credit to SMEs was not difficult. However, it required an effort to explain the program, the people involved,
and the way in which the firms would receive funding. This process occupied 2 Bridges for the first six months,
during which time the team identified key challenges and opportunities.

The main challenge was to mobilize financing for this class of companies. Regardless of the ability of the
program team to find good SME clients and to convince the banks and other financial institutions to consider
those clients, in the final analysis the banks had to make the credit decisions and put their own money on the line.
The banks, and not 2 Bridges, were making the loans. This was a key limiting factor to the program’s potential
for success.

The main opportunity was clear: there were more than 100,000 SMEs in Honduras, several thousands of
them known to the government and financing agencies because of their participation in efforts to inform these
SMEs about how to grow their businesses and to help them obtain financing. While the education process was
extensive, the actual financing efforts were quite limited and sporadic.

Initially, members of the program team visited microfinance institutions (MFIs) in Tegucigalpa, the capital
of Honduras, and San Pedro Sula, the main industrial city in the country. With 27 total registered microfinance
institutions operating in the country, the team expected to identify clients from among the companies that had
grown too large for microfinance to handle. Discussions with MFIs were sometimes cordial and sometimes
suspicious, but after several months of meetings and discussions, the 2 Bridges team realized that the MFIs really
did not have very many viable candidate companies that had graduated to the size of SMEs. Even though there
were over 250,000 clients of these microfinance institutions in Honduras, they were only willing and able to offer
just a dozen or so companies to the 2 Bridges program. The main clients of these institutions were individuals
taking loans of perhaps $US 50-100, and cooperatives of between five and ten people who likewise had very
small business needs. This was very disappointing, especially since the MFIs in several cases seemed to think that
2 Bridges wanted to steal their clients.4

The program team also visited commercial banks and found that half a dozen of them were apparently
committed to building their business in this market segment. Even so, the commitment had not led to very large
loan portfolios for SME lending in any of the banks. It appeared that the banks felt the need to assert publicly
that they were open to SME lending, but when the time came to make credit decisions, they viewed the firms
as unqualified to borrow. This was a key challenge of trying to promote more financing for SMEs.

Visits to government agencies such as the Ministry of Economy, the Central Bank, and the National
Commission of Banking and Insurance enabled Gómez and his team to talk with the regulators and understand
their policies toward financing the small and medium-sized companies. In each case, the government agencies
were committed to seeing greater credit extended to this sector, and viewed the 2 Bridges program as a useful
tool in this pursuit. The team learned about specific government policies to stimulate greater SME lending,

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including the Reciprocal Guarantee program and the Equipment Guarantee program (garantía hipotecaria, in
Spanish), both of which aimed to expand the acceptable kinds of loan guarantees by primarily using real estate.

The Bank Lending Bridge

As the program team developed a better understanding of the lending environment in Honduras, they attempted
to ally with major banks in the country. Initially, they selected one international bank (BAC) to build an alliance,
since their division of SME finance was the largest of the various financial institutions. In addition, the team

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looked to Banco Popular, which originated as a microenterprise finance institution, but which had changed its
business model a few years earlier to focus on SMEs and microenterprises. Talks with lending officials and the
division heads of SME lending demonstrated that:
• Banks were interested in having 2 Bridges help identify potential loan clients;
• Banks were not convinced that this new entity (2 Bridges) could produce bankable clients that fit their
lending criteria; and

or
• Banks were open to considering this kind of intervention with potential clients, even without a contractual
commitment between the bank and 2 Bridges.

It was particularly fascinating to see that while the banks were quite interested in finding new SME clients,
they were not at all receptive to accepting loan collateral other than physical property such as land or buildings
(the garantía hipotecaria). That is, the banks were extremely resistant to the idea of accepting alternative collateral
such as inventories, or even accounts receivable, from high-quality purchasers such as Walmart or the largest
Honduran grocery store, La Colonia. Receivables financing through the structure of factoring is legal in Honduras,
and some of the banks had experience in this form of discounting accounts receivables—but the banks were not
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keen to expand this kind of financing.5

The program began operations by focusing on one bank as the principal ally. However, after more than half
a year, it became clear that this bank was not going to accept many of the clients that 2 Bridges was presenting
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to them. As a result, the team expanded the portfolio of lenders, and this step quickly led to the authorization
of loans within the expanded bank pool. Ultimately, the original ally began to make some loans to the clients
that 2 Bridges was presenting, so that relationship continued.

By late 2013, the bank lending bridge had produced over $US 1.4 million of funding to SMEs in Honduras.
Exhibit 2 shows the loans and the lenders, amounts, and other characteristics.

The SMEs that obtained commercial bank financing in the first year came from a variety of lists provided
by various organizations. The first business in Exhibit 2 sold security systems, and some of the people involved
in the start-up of the program knew of their need for working capital. The hardware store and cement block
business was a “graduate” from a microfinance agency. Perhaps the most interesting was the agricultural supply
business in Comayagua. It had maxed out four separate credit cards on which it was paying 60% interest. In this
case, the challenge was nothing more than to connect the company with the bank, which found the business to
be very credible and was quite willing to replace the credit card debt with bank debt at one-fourth the cost. All
of these businesses had strong revenue streams, so the challenge was usually to present their situations clearly
enough that the banks could understand the business and make justified credit decisions. At the time of this case,
another 21 SMEs were being considered for financing by the five banks with which 2 Bridges worked.

As the relationship with the banks matured, Roberto thought that a logical possibility was that his role, and
the work of others like him, integrated into the commercial banks, could serve as a foundation for operational
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sustainability. The commercial banks were making money because of his work, since he was bringing them good
clients and doing a lot of the work to get these clients ready for the bank loan application process. In less than
a year, he had helped them place about a million dollars that would not have been loaned otherwise, especially
because the bank employees tended to stay within the bank building and not pursue clients in the marketplace. At
the same time, many bank officials had told him, “We really do not like these kinds of businesses,” referring to the
SME clients. This was because the SMEs tended to have weak collateral available, they did not present financial

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 Exhibit 2. Financing to Honduras SMEs via 2 Bridges Program, Nov. 2013–Mar. 2014
Type of Business Location Funding for Results
Radio Telecommunications Tegucigalpa Working capital Financing of $US 155,000—
Banco Davivienda
Industrial vehicle parts and Tegucigalpa Refinancing loan with Financing of $US 25,000—
components current bank Banco BAC
Industrial vehicle parts and Comayagua Line of credit Financing of $US 275,000—

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components Banco BAC and Banpais
Hardware store and cement Tegucigalpa Line of credit Financing of $US 110,000—
blocks Banco de Occidente,
City y Procredit
Spices, groceries, foodstuffs Tegucigalpa Working capital Financing of $US 5,000—
Banco Ficohsa
Water and ice factory Choloma Working capital; Financing of $US 450,000—
purchase of two trucks Banco del los Trabajadores
Clothing factory Choluteca Purchase of a knitting Financing of $US 10,000—
machine Banco Banadesa
Sale of men’s and women’s Danli Line of credit Financing of $US 40,000—
accessories Banco BAC
Event and party planning Choloma Working capital loan Financing of $US 13,073—
Banco City
Agricultural hardware Comayagua Line of credit Financing of $US 25,000—
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Banco Procredit
Salt factory Choluteca Working capital loan Financing of $US 7,297—
Banco Popular
Grocery store Teupasenti, Loan Financing of $US 9,690—
Danli Banco Popular
Services for fairs Tegucigalpa Working capital loan Financing of $US 100,000–
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Banco BAC
Hammock factory Choluteca Working capital loan Financing of $US 203,487—
Banco de BAC
TOTAL $US 1,428,547
Source: Company records.

statements as credible as those of large companies, and their leaders were unable to explain their businesses and
their needs in the terminology that the bankers liked to use.

For example, the owner of a candle company, an engineer who was applying for a loan, was brilliant at
making industrial machines, but had no interest in financial statements or in meeting in air-conditioned offices
with people who sit behind desks and ask questions. When Roberto first took him to the bank, the loan officer
told Roberto, “We do not like this kind of person.” The clients, likewise, did not like the people in the banks,
either, or the way that they were treated. They viewed the bankers as unfriendly and very limited in their interest
in the companies; all that the bankers wanted were numbers and collateral. In fact, this was one of the major
reasons that the intermediate role was necessary. Could Roberto convince the banks of the importance of this role?

The other problem, of course, was that no bank had made a formal commitment to the concept. In fact, it
seemed that unless Roberto made the funding of a specific SME project a competitive issue, openly sharing with
one bank that a competitor was considering the case, loan approvals stalled. All of the banks welcomed him; he
was bringing them good clients. But that did not mean that any specific bank was ready and willing to take on
his salary and expenses, and incorporate the SME bridge function into its operations.

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Building up the SME Client Base
While the team recruited bank lenders and contacted government agencies, they simultaneously began visiting
potential client companies. As noted above, the first source of potential client SMEs were the 27 registered
microfinance institutions operating in the country. After visiting a dozen of them, the team discovered that over
half of them only had very small clients. Of the remainder, only three or four had any clients that had grown large
enough to qualify for 2 Bridges services. And these microfinance institutions were reluctant to provide such clients
to 2 Bridges, very possibly because they realized that if the team took those clients to commercial banks, the clients
would find the bank lending facilities much more attractive (that is, lower cost) than the microfinance credits.

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As a result of this limitation, the team had to seek out other sources of potential company clients. First,
from a visit to the Ministry of Economy, the team identified a group of SME companies that participated in the
Ministry’s program of commercial fairs and training. That was sufficient to generate about 200 potential clients
which the team then examined to see which businesses would qualify for the program’s size criteria, would qualify
as socially sustainable, and would benefit from financing that the program could offer. This was the first major
source of clients that emerged. Over time, the list expanded through the team’s efforts to find additional sources

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of companies that might qualify for assistance through 2 Bridges.

A second group of client companies emerged through contact with a national association of companies,
Cohep (Consejo Hondureño de la Empresa Privada), in which a large number of members were SMEs. This group
included about 150 SMEs and provided another large source of potential client companies that 2 Bridges could
evaluate, and then work with those that appeared to be good candidates for credit. This source was particularly
helpful, since the Cohep association was directly interested in supporting its members, and connecting 2 Bridges
with those members was an excellent way to help them with financing that Cohep itself could not provide.
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In each of these cases, as well as with other sources of SMEs that the team discovered, the local representative
went through the list to assess the companies’ size, business potential, creditworthiness, and, finally, their need
for financing, to determine which clients bank lenders might accept. Over time, Roberto became quite skilled at
this, as it was a critical function. After all, what company does not want more money? But that does not mean
that they have a viable business that will qualify for a commercial bank loan.

The procedure for identifying new clients, codified in an operations manual, included questions about profits,
the needs for financing, and company ownership. The questions eliminated any company that could not provide
a simple and clear income statement demonstrating a profit margin. A brief inquiry about the company’s basis for
the funding proposal quickly eliminated SMEs that were looking for money for a car, travel, or investments of
a personal nature. Once companies passed the initial review, 2 Bridges’ representatives followed up with personal
interviews and a visit to the plant, office, or farm.

The purpose of SME client profiles was to select companies that could profitably grow to create sustainable
products and services, and at the same time create permanent employment. For example, the hardware store and
cement block factory were located in a poor community, and they not only employed many people, but also
provided financial support for the local schools. Proposals for investment in property or simply for commerce,
without local value added, were not accepted by 2 Bridges. Rather, the entrepreneurial element was sought in the
business owner, based on a solid track record of already existing business, and demonstration of a critical need
for additional capital for productive investment.

Although there were few avenues for SMEs to obtain bank funding in Honduras, many international and
government programs provided technical assistance. They also used “filters” in order to target their services at
worthy companies. Roberto obtained lists of participants in such training programs, and these allowed him to
piggyback on work that other groups had done in identifying SMEs. He then developed alliances with some
of these organizations, which allowed him to present his funding facilitation services to these potential clients.

These agencies, some international non-government organizations and others tied to foreign governments
providing assistance to Honduras, were also something Roberto thought about when considering the issue of
long-range sustainability of the program. If they spent a lot of money on instructors, hotels, meals, and training

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materials, why would they not also spend money to pay for people like himself, who go beyond the training to
help these companies obtain financing?

The Value Added by 2 Bridges

Since the 2 Bridges program did not provide funding directly to client companies through the bank lending bridge
(although it did through the Angel Venture Fund described below), what was the business model for the program?
It was, simply, to identify creditworthy small and medium-sized companies; to help them present their financial

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and business situations clearly to the bank lenders; and to put them in contact with those potential lenders. In
principle, it should be possible to charge a small fee for this service, and the fee could make the service sustainable.

The specific service that the bank lending bridge provided was a process that searched the business
community in Honduras to uncover potentially bankable companies in the SME size range, and then evaluated
each company that qualified in that range. 2 Bridges asked questions of the SMEs, typically, first by telephone
and then, if the client looked promising, through a subsequent visit to the client’s location. The client company
had to meet the criteria for being a good potential target for funding before a 2 Bridges representative would sit
down with the company’s leader(s) to identify precise information to present to the bank lenders. The criteria
specified that the company:
• sales were sufficient;
• borrowing needs fell into the range that 2 Bridges could finance;
•
•
•
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had a clear, viable business activity;
had expectation of growth with the new financing;
could provide an acceptable form of collateral.
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Once the company was vetted, the 2 Bridges representative presented the funding request to one or two
of the program partner banks. The choice of bank was determined by the desire to distribute the clients across
the ally banks, and the need to switch the client to another potential lender quickly if the initial choice was slow
to respond to the credit request. In the first approach to a potential bank lender, the 2 Bridges representative
accompanied the SME owner to the bank and helped with the conversation between banker and borrower. Once
the contact was established, the representative followed up with the bank periodically to check on the progress
of the loan request, and to intervene with the borrower if the bank requested additional information. If asked
by the borrower, the representative accompanied him/her on subsequent visits to the bank as well.

A key element to this process was that 2 Bridges vetted the companies by performing an initial evaluation
of the client, the business, the funding need, and a few other points, so that a bank lender could be approached
with a credible borrowing case. A common problem for SMEs dealing with banks in Honduras was that the banks
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expected clients to come to them with complete information before they made loan decisions. At the same time,
the client companies had no, or limited, experience dealing with banks, so they did not know how to present
themselves credibly to the banks. In addition, small companies were generally unaccustomed to having to go to
a bank for financing, when microfinance institutions and friends/family typically came to them. The cultural
differences between the banks and the SMEs were quite striking.

In sum, the 2 Bridges program allowed viable small companies to obtain hundreds of thousands of dollars
in loans, and thereby expand production and create employment. This was good for Honduras, which needed
jobs, because neither the microcredit sector nor the big business sector was creating sufficient jobs. This was also
good for the banks, as noted previously, since they had money to lend and needed clients.

The way in which 2 Bridges was good for the client was actually quite interesting. Of course, with additional
funds, the companies could make greater profits and grow. But a striking dimension was the reduction in lending
costs for clients because of the program. Those graduating from microfinance lending reduced their interest rate
by half, from a 32-36% annual rate to a 16-18% annual interest rate. And some clients, who had started their
business by combining several credit card accounts, reduced their interest costs by more than two-thirds, from
60% to 16-18%. The impact on the SME of this reduced cost of capital was as substantial as the impact of having
the funds available for new expansion.

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 For example, one of the companies, a provider of security and alarm systems in the two major Honduran
cities of San Pedro Sula and Tegucigalpa, presented a simple proposal for funding to expand their already successful
business model to three other large cities in the country, for which they needed about $50,000. To their surprise,
they not only obtained the funds for expansion, but at a cost of capital that was half of what they expected.
They were very happy with the program (though they still reserve their right to mistrust the people in the bank).

As Roberto reflected on this, he was also quite sure that the clients would be happy to pay him for his
services. Some even offered! But there was no mechanism in place to charge the clients. The bank could do this
by adding a few points to their fee, but, as noted before, the banks had not considered paying Roberto for his
services. Borrowers would probably have been happy to contribute a percentage point or two for the costs, but
how could this be implemented?

The Angel Venture Fund Bridge

From the beginning of the effort to generate greater SME financing in Honduras, the goal was to include a
second bridge through equity financing. This proved to be extremely difficult, mainly because of the cost involved.
Establishing a venture fund to invest in Honduran SMEs was complicated by the need to decide where to locate
the fund. In addition, Roberto had to decide how to structure the management, ownership, funds transfers related
to the fund, and the investments themselves. The effort to create a venture fund to pursue equity investments
turned out to be quite a headache.

Despite complications, the Angel Venture Fund–Honduras opened as a bank account in the United States
in October 2012. The principal program director owned the account, and the funds in the account comprised
half of the total grant from the Argedius Foundation. The other half went into a separate account to pay for costs
of operating the bank lending bridge. Money from the venture fund account was used to recruit investors and
to pay for costs associated with legal issues such as incorporation.

The first major hurdle was the need to establish a fund structure that would offer investors the confidence
of a U.S. legal base and allow the companies in Honduras to receive the funds and pay dividends without too
many legal hurdles or tax costs. The initial estimate for legal services in the U.S. was a minimum of $US 35,000,
or fully half of the total funds available to put together the fund. This was clearly untenable, and the program
team looked for alternatives. Fortunately, the program was linked to the Aspen Institute’s Aspen Network of
Development Entrepreneurs (ANDE), which includes several law firms that work pro bono to support efforts to
help entrepreneurs in developing countries. The DLA Piper law firm in New York offered its help, and, over the
months, three of their attorneys helped establish the Angel Venture Fund–Honduras, LLC.

The fund needed a master partnership to oversee the receipt of investment funds and the actual investments
in Honduran companies. It also needed a limited partnership in which the investors could put their investments
without taking on any liability for the companies that received equity investments. Both of these partnerships
were established in Delaware. Ultimately, it was decided that a second limited partnership was needed outside of
the U.S. (in the Cayman Islands), to avoid U.S. tax liability for non-U.S. investors in the fund. There would be
no legal entity in Honduras, because guidance from the Commission on Banking and Insurance established that
the fund would not be subject to regulation in Honduras, other than the requirement to pay tax on dividends
received from the invested companies. These partnerships enabled the principals in the fund, plus a Honduran
colleague on the investment committee, to make decisions about investments in Honduran companies.6

Initially, the fund was a small-scale venture to see if investors could be attracted and if a legal structure could
be established that would not be too burdensome. The fund had a ceiling of $US 500,000 with investments in
Honduran companies ranging from $US 25,000–100,000. At the time, there were five committed investors with
initial investment in three companies expected by January or February 2014. The intent was to have a dozen
companies invested by the end of the externally funded grant in March 2014.

The problem of identifying investable companies was easy to solve, since they were the same potential clients
as those presented to bank lenders. As the 2 Bridges team talked with prospective client companies during 2013,
the team discovered that about half of them were interested in at least considering equity financing. Because of

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the continuing effort to identify viable creditworthy companies, the team expected to be able to select two or
three companies so that by early 2014 the Angel Venture Fund–Honduras could begin its investment activity.
The overall number of companies to be funded for investment expansion needs would likely not exceed a dozen
so that the bank lending part of the program would be protected from a significant loss of potential clients.

The invested companies had market values of somewhere in the range of $US 250,000 to $US 2 million,
and the Angel Venture Fund invested an average of $US 50,000 in each of them. The fund took minority
positions in the companies of around 10-20% of the company’s total share value. In exchange for the equity
position, the fund required one seat on the company’s board and an annual distribution of 1% of company sales
as a preferred dividend.

Why and How the Model Is Sustainable

The 2 Bridges model of expanding financial resources available to SMEs in Honduras was sustainable on the
basis that the organization provided a service of value to the lending banks and to the borrowing companies.
The program team finalized a simple contractual agreement to be used with the lenders, to charge them a fee
of 1% of the value financed for all approved loans for the clients presented by 2 Bridges. As for the borrowing
companies, likewise, a fee would be charged for successful funding with a range of $US 100–500 (one-half of
1% of the total funding), depending on the amount of funding obtained. On both sides, the fee would only be
charged in the case of successful financing.

At the rate of funding of approximately $US 1.5 million per year, this would produce fees of $US 15,000
from the banks, which would approximately pay the cost of the local representative in Honduras. The additional
$US 7,500 from charging the successfully financed client companies would pay additional operation costs, leaving
the program still short of its total needs as an independent entity. If the program were to grow as projected, 2
Bridges could expect a doubling of the funding and consequent revenue generation. This should be sufficient to
pay minimum operating costs of the program, although further efforts to build up the revenue base of 2 Bridges
would have to continue.

With all of the advances in the project that were achieved during the past year, Roberto Gómez was excited
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about the possibility of putting 2 Bridges onto a sustainable path without an external subsidy. Even so, he felt
somewhat uncomfortable without having a specific outcome identified that would make the program solidly
profitable.

The first thing that Roberto had to admit was that this program was far more successful than he had
expected when he started this assignment. He was proud of his part in developing profitable businesses in his
country that provided needed products and jobs. At first, it did not seem like any of the banks would help, and
now they were competing to get his clients. He established a network of contacts with bank officials, and the
processes that took so long at the beginning were getting much easier.

He had not known if he would find many SMEs that would qualify for bank loans. As he built up the
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network of links to associations of companies and government-sponsored programs for SMEs, he was surprised
by his ability to gain access to solid quality companies. He was very pleased to see the expansion of profitable
businesses.

But what is the sustainable service delivery system? It would be easy if one of the banks would agree to
contract with him for his service, but he still is promoting competition between them even to get funding. It
o

seems logical, also, that a non-government agency might want to fund this activity. After all, so much money
has been invested in microfinance, and he has been able to help SMEs access millions of dollars without owning
the investment capital. This seems like a good deal all around.

Finally, there are his many happy clients. Most of them got involved with the expectation of obtaining
additional business capital, but had no idea that commercial bank loans were so inexpensive in comparison
with microfinance, credit card use, or informal sector banking. They cannot believe their good fortune. Could
2 Bridges be converted into a sustainable program?

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Endnotes
1
An angel fund offers business guidance without charge, helping a company with strategy advice, access to foreign markets,
guidance on information systems, and other business advice.
2
Polak, Paul, and Warwick, Mal. The Business Solution to Poverty. San Francisco: Berret-Koehler Publishers, 2013.
3
Karnani, Aneel. Fighting Poverty Together: Rethinking Strategies for Business, Governments, and Civil Society to Reduce Poverty.
New York: Palgrave Macmillan, 2011.
4
While 2 Bridges did not want to steal any clients, it became obvious that if an MFI client also obtained some funding
from a commercial bank, the client would discover that the banks’ lending rate was on the order of 16-19%/year, while the
MFIs were charging 32-36% on most of their loans to the microenterprises. This clearly would entice the clients to leave
their MFI lenders for the less expensive bank lenders.
5
The bank lenders claimed that the Central Bank imposed much higher reserve requirements on any loan collateral other
than real estate or buildings. The project team did not get the same response at the Central Bank, but the specific collateral
requirements for using inventory or accounts receivable or securities as collateral was not available. If a broader range of
collateral items were feasible on reasonable terms under the Central Bank’s rules, this could facilitate a significant expansion
of bank lending.
6
Another legal concern was to have an external auditor to review the fund’s books once a year. This cost also was determined to
be prohibitive within the constraints of the program, so the 2 Bridges team was seeking pro bono help for that service as well.

10 A02-17-0004