Poverty and inequality stem from lack of access and opportunity, a problem deeply ingrained in the community. A common approach to poverty alleviation is making donations, which creates access. However, this is often a short-term solution as supply runs out and goods are not responsive to consumer desires. Furthermore, donations severely limit the capacity for large-scale distribution due to the restricted quantities. In areas where distribution channels are underdeveloped and profit margins are low, large corporations are resistant to enter markets. While donations are ineffective, finance models like microfranchise, microcredit, and microconsignment are successful in supporting entrepreneurs in poorer areas through initial capital support. Our research concluded microconsignment is the most effective business model for low income communities in South Africa.

Microfranchise

Microfranchises are established companies with working operating systems and known brands. It is a franchise scaled down to an affordable price, which allows low income people to purchase a branch. In developing countries, the price for a microfranchise branch ranges between $5,000 to $15,000 USD (“What is Microfranchising?,” 2010). Local entrepreneurs, or microfranchisees, use a microcredit model as a finance mechanism for the financing of the microfranchise, and organizations, or microfranchisors, create the access to products that empower these local entrepreneurs to get started and grow. An example is VisionSpring; it is a social enterprise that uses a microfranchising model to reduce poverty and generate opportunity by selling reading glasses at an affordable price (Sireau, 2011).

Since a large majority of low-income individuals in developing countries do not have the necessary skills to develop their own business, microfranchises provide the benefits of being “ready-made.” It removes the need to set up a financial model, supply chain, relevant technologies, business partnerships, and communication systems because they are already established within the franchise. The entrepreneur also does not have to deal with the legal issues, licensing, and real estates – all other hindrances to starting businesses from scratch (“What is Microfranchising?,” 2010).

The microfranchise model provides both financial capital and product access with the benefit of little start up needed. However, an individual is still required to use credit for the initial investment.

Microcredit

In a credit model, entrepreneurs buy products on credit and sell them. They then use the revenue from the sales to pay back the loan and ideally buy more products to sell (“The MicroConsignment Model,” 2010). The microcredit system is similar to the credit system; however, it operates on a much smaller scale. This model provides access to capital for local entrepreneurs and solves the problem of not having financing for their business. Grameen Bank in Bangladeshi, founded by Muhammad Yunus, was the first to begin the system of microcredit by offering loans to poor women, which provided them an opportunity to help themselves (Kowalik & Martinez-Miera, 2010).

Microcredit is a suitable financial mechanism for entrepreneurs with low start-up costs. However, the best customer for the microcredit model is the end clients. This is because existing businesses with known suppliers can benefit from credit by buying bulk goods at a lower cost (“The MicroConsignment Model,” 2010). This is similar to US businesses that borrow commercial loans, sell stocks, and voluntarily enter debt to gain the working capital they need to grow.

Established businesses are better situated to sustain scheduled loan repayments and high transaction costs associated with the microcredit model. An entrepreneur’s success is measured by their ability to make regular loan payments. In order to achieve the supply and demand, entrepreneurs have to quickly learn and start to sell immediately and consistently without fail. They are unsuccessful when they are left with an outstanding loan. However, entrepreneurs often use all or most of their earnings for personal or family needs leaving them with very little to pay down the loan or restock inventory, stunting their growth (“The MicroConsignment Model,” 2010).

The microcredit model provides the financial capital entrepreneurs need, but it may not be appropriate for new entrepreneurs because regular loan payments begin immediately. It also fails to provide access to local distributors and create a safety net for entrepreneurs if they are unable to sell their products.

Microconsignment

A microconsignment model requires no initial financial investment from entrepreneurs. Instead, the organizations provide products to entrepreneurs at no cost. The entrepreneurs then sell the products, pay back the supporting organization, and earn some profit. After the inventory is restocked again at no cost and the cycle continues (“The MicroConsignment Model,” 2010). This reduces negative outcomes by eliminating the need for start-up capital and avoiding financial failure since the goods are cosigned. The capital is tied up in the organization’s products being sold instead of in a loan that the entrepreneur must pay back. Therefore, the only upfront cost is training; afterwards, costs are variable since they are connected to revenues.

Unlike loans, consignment allows entrepreneurs to “test drive” a product without fear of failure. This enables local entrepreneurs to use a trial and error method to evaluate the market needs and provide access to new, essential products and services that address their needs (Smith, 2011). Microconsignment creates access to key technologies, products, and services by developing new opportunities for entrepreneurs.

To provide the products and services to the people, entrepreneurs and organizations must be partnered together. Even though the organization provides the products, it is not successful without the knowledge and distribution of the local entrepreneurs who understand the needs of the communities. This model empowers the entrepreneurs, who usually have little education and no business experience (“The MicroConsignment Model,” 2010). Through the training program, entrepreneurs are given new skills and taught how to make informed decisions in exchange for their time. As a result, products and services reach the villagers, entrepreneurs earn money and respect in the community, and organizations help the area in need and earn a profit. Success is measured in sales to villagers, not sales to entrepreneurs. The microconsignment model can best be depicted below:

Microconsignment Concept (Adapted from “The Microconsignment Model”, 2010)

Overall, microconsignment provides entrepreneurs with the opportunity to service their communities without the initial financial investment. The partnership between the organization and entrepreneurs also provides continuous access to goods for community members. In a microconsignment project in Guatemala, local entrepreneurs were given the materials on consignment to build the concrete stoves. They then sold the stoves to villages at an affordable cost and developed an income-generating opportunity for themselves (“Our Story,”).

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