Non-Banking

Products –
Lending Based
 LEARNING OUTCOMES
⮚ Lease Finance

⮚ Conceptual and Regulatory Framework

⮚ Classification and Financial leasing

⮚ Hire Purchase and Consumer Credit

⮚ Working Capital Finance - Factoring and Forfeiting

⮚ Housing finance

⮚ Venture capital financing

⮚ Buy now pay later

⮚ Microloans.
 Lease financing
Lease financing is a popular medium and long-term financing option in which
the owner of an asset grant another person the right to use the asset in
exchange for a periodic payment. The asset’s owner is known as the lessor, and
the user is known as the lessee. A contract is to be made between the lessor
and the lessee regarding the terms and conditions of the lease. After the lease
period is over, the asset goes back to the lessor (the owner). There can also be a
provision in the contract regarding compulsory buying of the asset by the lessee
(the user) after the lease period is over.
The lessee is given the right to use the asset, but the lessor retains ownership,
and the asset is returned to the lessor at the end of the lease contract, or the
lessee is given the option to purchase the asset or renew the lease agreement.
 Lease financing
Advantages:

A. To Lessor: The following are the benefits of lease financing from the perspective of the
lessor:
• Regularly Assured Income: Lessors receive lease rentals by leasing an asset for the
duration of the lease, which is a guaranteed and consistent source of income.
• Ownership Preservation: In a finance lease, the lessor transfers all risk and rewards
associated with ownership to the lessee without transferring asset’s ownership, so
the lessor retains ownership.
• Tax Advantage: Because the lessor owns the asset, the lessor receives a tax benefit
in the form of depreciation on the leased asset.
• Profitability is high: Leasing is a highly profitable business because the rate of
return on lease rentals is much higher than the interest paid on the asset’s financing.
• Growth Possibilities: There is a lot of room for growth here. Because leasing is one
of the most cost-effective forms of financing, demand for it is steadily increasing.
Even amid a depression, economic growth can be maintained. As a result, leasing has
a much higher growth potential than other types of businesses.
 Lease financing

❑ Essential Elements Leasing

❑ Parties to contract: Lessor, Lessee, & (Lease
financier)

❑ Ownership Separated from user

❑ Terms(tenure) of Lease: Agreement will in-

operative if tenure is not mentioned
❑ Lease Rentals
Lease financing
Lease financing
 Lease financing
Advantages:
To Lessee: The following are the benefits of lease financing from the perspective of the
lessee:

• Capital Goods Utilization: A business will not have to spend a lot of money to acquire
an asset, but it will have to pay small monthly or annual rentals to use it. The business
can use its funds for other productive purpose.
• Tax Advantages: Lease payments can be deducted as a business expense, allowing a
company to benefit from a tax advantage.
• Cheaper: Leasing is a form of financing that is less expensive than almost all other
options.
• Technical Support: Regarding the leased asset, the lessee receives some form of
technical support from the lessor.
• Friendly to Inflation: Leasing is inflation-friendly because the lessee is required to
pay a fixed amount of rent each year, even if the asset’s cost rises.
• Ownership: After the primary period has expired, the lessor offers the lessee the
opportunity to purchase the assets for a small fee.
 Lease financing

Disadvantages:

A. To Lessor: The following are the disadvantages of lease financing from the
perspective of the lessor:
• In the event of inflation, it is unprofitable: Every year, the lessee receives a
fixed amount of lease rental, which they cannot increase even if the asset’s cost
rises. So, it is unprofitable during inflation.
• Taxation twice: It is possible to be charged sales tax twice: The first is when
the asset is purchased, and the second is when the asset is leased.
• Greater Risk of Asset Damage: As the ownership is not transferred, the
lessee treats the asset carelessly, and there is a great chance that it will not be
usable after the primary lease period ends.
 Lease financing
Disadvantages:

B. Lease financing from the perspective of the lessee:

• Compulsion: Finance leases are non-cancelable, and lessees must pay lease rentals
even if they do not intend to use the asset.
• Ownership: Unless the lessee decides to purchase the asset at the end of the lease
agreement, the lessee will not become the owner of the asset.
• Costly: Lease financing is more expensive than other types of financing because the
lessee is responsible for both the lease rental and the expenses associated with asset
ownership.
• Asset Understatement: As the lessee is not the owner of the asset, it cannot be
included in the balance sheet, resulting in an understatement of the lessee’s asset.
 Lease financing

Classification of Lease
1.Finance & Operating Lease
2.Sales and Lease back AND Direct Lease
3.Single Investor and Leveraged Lease
4.Single Investor and Leveraged Lease
5.Domestic and International Lease
 Finance & Operating Lease
Finance Lease
he term “finance lease” refers to the mutual contract according to which the lessor transfers the
ownership of the asset to the lessee before the expiry of the lease agreement. In other words, in a
finance lease, the lessee is transferred all the risks and rewards associated with the leased asset before
the expiry of the lease agreement.
In a Finance lease, the assets is being given to the lessee on lease for the entire economic life of assets
.
E.g. Ship, aircraft, railway wagons etc.
Explanation
It is predominantly used for the purchase of equipment. Further, not all leases qualify as a finance lease
as there are certain requirements that should be met in order to be considered as a finance lease.
• The lessee will have the option to purchase the asset at a bargain price after the expiry of the lease
agreement.
• The duration of the lease covers at least 75% of the useful life of the asset.
• The present value of the future lease payments should add up to a minimum of 90% of the asset’s
value.
 Finance & Operating Lease
Key Features:
❑ Finance Lease is suitable for ships, aircraft, railway wagons, lands, buildings,
and heavy machines.
❑ Finance Lease is a long-term, non-cancellable lease agreement.
❑ In Finance Lease the cost of assets is fully amortized during the primary
lease period.
❑ In Finance Lease, the lessee has the option to purchase the asset at the end
of the lease period.
❑ Finance Lease is also called a “Full Pay Out Lease”.
❑ Maintenance of assets is done by the lessee.
 Finance & Operating Lease
Operating Lease:
According to the IAS-17, an operating lease is one which is not a finance lease. In
an operating lease, the lessor does not transfer all the risks and rewards incidental
to the ownership of the asset, and the cost of the assets is not fully amortized
during the primary lease period
Key Features:
❑ An operating Lease is useful in the case of computers, office equipment,
automobiles, etc.
❑ An operating Lease refers to a short-term lease agreement or the term of the
lease is always lesser than the economic life of an asset.
❑ The primary lease period does not cover the cost of an asset. Maintenance of
assets is done by the lessor.
❑ Operating Lease is also called a “service lease”
 2. Sale and lease back and Direct lease
“In this, the owner of an asset sales it to the leasing company (lessor) which
leases it back to the owner (lessee)”.
For exp. Safe Deposit Vaults by Banks

Direct Lease:
A. Bipartite Lease: “In such lease, there are two parties in the lease
transaction namely equipment supplier cum lessor and lessee”.

A. Tripartite Lease: “In such lease, there are three parties in the lease
agreement namely equipment supplier, lessor, and lessee.
3. Single Investor Lease and Leveraged Lease

In such a lease, two parties namely the lessor and the lessee are included in the
lease transaction.
The leasing company (lessor) funds/finance the entire investment with an
appropriate mix of debt and equity funds.
3. Single Investor Lease and Leveraged Lease

Leveraged Lease: Three parties are involved in the lease transaction namely
Lessor (equity investor), Lender, and Lessee.
 4. Domestic Lease and International Lease

“A lease transaction is classified as domestic if all the parties to the agreement, namely
equipment supplier, lessor, and lessee are domiciled in the same country”.

International Lease: “If the parties to the lease transaction are domiciled in different
countries, it’s known as an International lease”.

A. Import Lease: “In an import lease, the lessor and lessee are domiciled in the same
country but the equipment supplier is located in a different country.

B. Cross Border Lease: “It means the lessor and lessee are domiciled in different
countries. The domicile of the supplier is immaterial in this case.
 Hire Purchase
Hire purchase means a transaction where goods are purchased and
sold on the terms that:
(i) Payment will be made in installments
(ii) The possession of the goods is given to the buyer immediately
(iii) The property (ownership) in the goods remains with the vendor
till the last installment is paid
(iv) The seller can repossess the goods in case of default in
payment of any installment
(v) Each installment is treated as hire charges till the last
installment is paid.
Features Of Hire Purchase
Terms Used In Hire Purchase
Agreements
 Types Of Hire Purchase
Based on the purpose of the purchase, it is categorized into two types:
Sometimes, a third party, i.e., the financier, purchases goods on behalf of the
customer. This third party gets into a purchase agreement with the customer.
Based on the agreement, the customer becomes the owner as soon as they
pay the final installment. Till then, the financier owns the title of goods; The
financier also pays the purchase price to the seller. Later, the lender recovers
this amount from the customer—in periodic payments. In case of non-
payment, the lender has the right to seize goods.
Alternatively, the consumer can directly enter into a purchase agreement—
with the seller. If so, the buyer has to pay a down payment. Over time the
buyer repays the remaining amount with interest—in periodic installments.
The buyer becomes the owner once payment is completed.
Hire Purchase Calculation
CALCULATION OF TOTAL CASH PRICE WITHOUT USING ANNUITY TABLE
SOLUTION:
CALCULATION OF TOTAL CASH PRICE USING ANNUITY TABLE
EXAMPLE:

SOLUTION:
At the time of calculating interest there may arise two situations:
When the cash price, rate of interest, and the amount of installments are given:
 CLASSROOM ACITIVITY

QUESTION:
SOLUTION:
When the cash price and amount of installment are given but the rate of
interest is not given
EXAMPLE:
SOLUTION:
SOLUTION:
ACCOUNTING FOR HIRE PURCHASE TRANSACTION

In the books of Hire Purchaser

ACCOUNTING FOR HIRE PURCHASE TRANSACTION
ACCOUNTING FOR HIRE PURCHASE TRANSACTION
ACCOUNTING FOR HIRE PURCHASE TRANSACTION
INTEREST SUSPENSE
METHOD
IN THE BOOKS OF HIRE VENDOR
IN THE BOOKS OF HIRE VENDOR
IN THE BOOKS OF HIRE VENDOR
IN THE BOOKS OF HIRE VENDOR
REPOSSESSION
COMPLETE REPOSSESSION
PARTIAL REPOSSESSION
CLASSROOM ACTIVITY

• DIFFERENTIATE BETWEEN LEASING AND HIRE

PURCHASE
 Consumer Credit
Consumer credit also referred to as consumer debt – is the credit
facility extended to individuals to buy goods or services. Though many
sorts of loans are labeled as consumer credits, the term is used more
specifically from the standpoint of unsecured lending. However, it does
not mean that the consumer credits are granted without collaterals.
Many consumer credits are backed by collateral.

Consumer credit lets consumers get an advance to buy products and

services. In a crisis, such as a car breakdown, health emergency, etc., the
consumer credits can be lifesavers.
Consumer credit for financial inclusion
The financial inclusion story so far is led by commercial banks and NBFCs.
The NBFCs have constantly been attempting to compete with banks for
market share in financial services. This reflects in the Financial Stability
report published in 2021. By extending loan facilities to the unbanked
sector in the country, these entities are contributing immensely to
financial inclusion. Credit facilities are essential in India as a large
percentage of the population in the country are self-employed or run
small business entities with limited capital resources.

Maximum consumer loans are unsecured, deprived of any guarantee to the

lending institution, and used typically to finance personal expenses on
articles such as automobiles, consumer durables, etc. maximum
 Consumer lending market
The Indian lending market has grown considerably driven by microfinance and retail finance
institutions. According to the survey results published by CRIF High Mark, an Indian credit bureau,
the Indian lending market as of March 2021 is at Rs 156.9 lakh crore. The report mentions that over
the last five years, segments like micro-lending, retail and commercial lending have grown by 91
%, 157 %, and 93 % correspondingly. The changes in consumer lending patterns and super active
digital financial intermediaries are set to be the game changers in financing lifestyle requirements
of people not currently covered by the formal banking system. Buy-now-pay-later offers point-of-
sale finance, letting credit cardholders convert purchases into zero interest EMIs and even direct
borrower acquisitions by fintech players form a fascinating value chain for retail customers. This is
a gigantic segment of borrowers underserved by traditional banks and non-banking financial
companies. The ease in their lending process is a stimulating reform when compared to the
elegant process espoused by banks. Person-to-person contact is bit by bit getting disregarded
with their credentials speaking to lenders and partaking in the information of creditworthiness.
 Creditworthiness
Creditworthiness is a term that refers to a person's ability to repay a loan. Lenders use a variety
of methods to evaluate an individual's creditworthiness, including their credit history, income,
and employment history. The five Cs of good credit are character, capacity, capital, collateral,
and conditions.
 Types of Consumer Credit

The well-known types are revolving credit and installment credit. This classification is
based on various factors like repayment structure and collateral.
 Revolving Credit &Installment Credit
Revolving Credit
Generally, a revolving credit account user can spend any amount at any time at their discretion
but not cross the predefined upper limit. There is a repeating spending limit and duration. For
example, in the case of credit cards, users can utilize the repeating credit facility every month.
The user can pay back the total credit used part by part like a fixed amount per month or quarter.
Credit keeps on revolving in a cyclical process where individuals can buy different goods and
services. The credit issuing company has the right to close the account if the individual cannot
make timely payments. Credit cards business or personal lines of credit are prominent examples
of revolving credit.
Installment Credit
nstallment credit occurs when the customer takes banks or other financial institutions’ help to
get a fixed amount to buy particular consumer goods and services. Upon receiving the credit,
the customer buys the item and pays for it in a set amount, including the interest calculated in
monthly installments. Car loans, personal loans, etc., are examples of installment closed credit.
However, once it is taken for a purpose, the amount availed is fixed, and usually, a top-up loan
is not allowed.
What Are the Advantages of Consumer
1. Improved Purchasing Power Credit?
People with limited income often cut back on their expenses to save before they
can purchase big-ticket items. However, with consumer debt, you can take a loan
to pay for the product in full upfront and then repay the loan amount in the form
of installments.
2. Convenience
Credit consumers do not need to carry huge cash or write a cheque when
shopping. So, technically you do not even pay for a good or service out of your
pocket. The loan provides you with additional funds, which you repay in smaller
amounts over an extended period.
3. Rewards
Lenders, especially credit card companies, offer special discounts and rewards to
encourage people to avail of their credit services. The perks often include
cashback, redeemable reward points, zero-cost financing, etc.
What Are the Disadvantages of Consumer
Credit?
1. Inflated Product Cost
Consumer debt provides consumers with easy credit to pay for their purchases in
full upfront, but it also makes the product more expensive. When you buy a
product without availing of credit, you pay only the sticker price. However, when
you avail of credit, you also have to pay interest, which makes the product’s final
cost higher than its sticker price.
In case a borrower fails to pay off a monthly installment, it attracts additional
interest, further adding to the product’s cost.
2. Risk of Accruing More Debt
Consumer debt, especially credit cards, provides consumers with easy credit. So,
paying for every purchase through credit may be tempting. And if they fail to
manage their installments, they may have more debt.
 Working capital finance
Working capital finance refers to the funds a company uses to finance its daily operations, such as
paying for raw materials, wages, and other short-term expenses. It is the amount of money a
business has available to meet its day-to-day operating expenses, including purchasing inventory,
paying salaries, and covering other short-term expenses.
Working capital finance can be used to manage a company's cash flow and to ensure that it has
enough liquidity to operate smoothly. It is typically provided by banks, financial institutions, or
other lenders and can take the form of short-term loans, lines of credit, or other financing options.
Effective management of working capital is critical to the success of any business, as it allows the
company to meet its obligations in a timely manner, avoid costly delays or disruptions in its
operations, and take advantage of new opportunities for growth. Working capital finance is an
important tool that businesses can use to manage their cash flow and maintain their financial
stability.
 What is 'Factoring'
Factoring is a type of finance in which a business would sell its accounts
receivable (invoices) to a third party to meet its short-term liquidity needs.
Under the transaction between both parties, the factor would pay the
amount due on the invoices minus its commission or fees.

In order to meet short-term liquidity needs, a business has to sometimes

resort to factoring. It is slightly different from invoice financing. There are
four main types of factoring - maturity factoring, finance factoring, discount
factoring, and undisclosed factoring.
 What is 'Factoring'
Factoring is defined as a method of managing book debt, in which a business receives
advances against the accounts receivables, from a bank or financial institution (called as
a factor). There are three parties to factoring i.e. debtor (the buyer of goods), the client
(seller of goods) and the factor (financier). Factoring can be recourse or non-recourse,
disclosed or undisclosed.
 What is 'Factoring'

In a factoring arrangement, first of all, the borrower sells trade

receivables to the factor and receives an advance against it. The
advance provided to the borrower is the remaining amount, i.e. a
certain percentage of the receivable is deducted as the margin or
reserve, the factor’s commission is retained by him and interest on
the advance. After that, the borrower forwards collections from
the debtor to the factor to settle down the advances received.
 What is Forfaiting

Forfaiting is a mechanism, in which an exporter surrenders his rights to receive

payment against the goods delivered or services rendered to the importer, in
exchange for the instant cash payment from a forfaiter. In this way, an exporter
can easily turn a credit sale into cash sale, without recourse to him or his
forfaiter.

The forfaiter is a financial intermediary that provides assistance in international

trade. It is evidenced by negotiable instruments i.e. bills of exchange and
promissory notes. It is a financial transaction, helps to finance contracts of medium
to long term for the sale of receivables on capital goods. However, at present
forfaiting involves receivables of short maturities and large amounts.
What is Forfaiting
 Key Differences Between Factoring and
Forfaiting

1.Factoring refers to a financial arrangement whereby the business sells its trade
receivables to the factor (bank) and receives the cash payment. Forfaiting is a form of
export financing in which the exporter sells the claim of trade receivables to the forfaiter
and gets an immediate cash payment.
2.Factoring deals in the receivable that falls due within 90 days. On the other hand,
Forfaiting deals in the accounts receivables whose maturity ranges from medium to
long term.
3.Factoring involves the sale of receivables on ordinary goods. Conversely, the sale of
receivables on capital goods are made in forfaiting.
4.Factoring provides 80-90% finance while forfaiting provides 100% financing of the
value of export.
 Key Differences Between Factoring and
Forfaiting

1.Factoring can be recourse or non-recourse. On the other hand, forfaiting is always

non-recourse.
2.Factoring cost is incurred by the seller or client. Forfaiting cost is incurred by the
overseas buyer.
3.Forfaiting involves dealing with negotiable instruments like bills of exchange and
promissory note which is not in the case of Factoring.
4.In factoring, there is no secondary market, whereas in the forfaiting secondary
market exists, which increases the liquidity in forfaiting.
Housing finance
Housing finance refers to the various financial products and services used to
fund the purchase, construction, renovation, or maintenance of residential
properties. These may include mortgages, home loans, home equity loans or
lines of credit, and other forms of financing.

Housing Finance Company

The Housing Finance Company is yet another form of non-banking financial
company which is engaged in the principal business of financing of
acquisition or construction of houses that includes the development of plots
of lands for the construction of new houses.
The Housing Finance Company is regulated by the National Housing Bank. Any
non-banking finance company can operate as a housing finance company, subject
to the fulfillment of basic requirements as specified in the Companies Act, 1956.
 Conditions that must be met by the non-banking finance
company to perform the business of financing of houses
(construction
• The company should and acquisition)
have its primary business of providing finance for housing, whether
directly or indirectly.
• The company should obtain a certificate of registration (COR) from the National Housing
Bank (NHB). The company conducting such business without a COR is an offense punishable
under the provisions of the National Housing Bank Act, 1987, also the NHB can demand the
winding up of such a company.
• The company should have a minimum Net Owned Fund of Rs 10 Crore.
Once these basic requirements are fulfilled, the company should comply with the following
conditions to get registered as a Housing Finance Company:
• The company shall be in such a position that it is able to meet the full claims of its present as
well as future depositors as and when these accrue.
• The affairs of the housing finance company should not be detrimental to the interest of the
present and future depositors.
• The management of the company should not be prejudicial towards public interest or to the
interest of its depositors.
• The Company should have an adequate capital structure and better income prospects.
• The certificate of registration shall not be prejudicial to the operation and growth of the
housing finance sector of the country.
Advantages of Housing Finance

1.Among the financial services, housing finance creates employment, both directly and
indirectly.
2.Industries such as cement, brick manufacturing, sanitary products, electrical fittings and
glass industries experience more demand due to house construction.
3.Rural housing develops not only rural areas but prevents migration of labor to urban areas.
4.Housing finance helps in the creation of more houses which results in building up more
infrastructure facilities, such as roads, electricity generation, drinking water facilities, etc.
5.Factories or industrial establishments create townships by providing more housing facilities
to their employees. Housing finance thereby reduces congestion in urban areas.
6.Due to housing finance, there is a vertical expansion and re-building of dilapidated houses
and re-modelling of the existing houses.
7.Non-conventional energy gets popularized due to modern housing facilities which is one of
the major benefits of housing finance.
 What is Venture Capital Financing?
Venture capital financing is a type of private equity investing specific to earlier-stage businesses
that require capital. In return, the investor receives an equity stake in the business through the
issuance of some type of security instrument.
Venture capital firms have a variety of different securities they use depending on the nature of
the investment. The most common securities are convertible debt (often called convertible
debentures), SAFE notes, and preferred stock.
The kind of instrument an investor chooses depends on a variety of factors related to the
company and the investor’s own risk tolerance.
• Venture capital is a term used to describe financing that is provided to companies and entrepreneurs.
• Venture capitalists can provide backing through capital financing, technological expertise, and/or managerial
experience.
• VC can be provided at different stages of their evolution, although it often involves early and seed round
funding.
• Venture capital funds manage pooled investments in high-growth opportunities in startups and other early-
stage firms and are typically only open to accredited investors.
• Venture capital evolved from a niche activity at the end of the Second World War into a sophisticated industry
with multiple players that play an important role in spurring innovation
 Advantages and Disadvantages of
Venture Capital
Venture capital provides funding to new businesses that do not have access to stock
markets and do not have enough cash flow to take on debts. This arrangement can be
mutually beneficial because businesses get the capital they need to bootstrap their
operations, and investors gain equity in promising companies.
There are also other benefits to a VC investment. In addition to investment capital, VCs
often provide mentoring services to help new companies establish themselves and
provide networking services to help them find talent and advisors. A strong VC backing
can be leveraged into further investments.
On the other hand, a business that accepts VC support can lose creative control over its
future direction. VC investors are likely to demand a large share of company equity, and
they may start making demands of the company's management as well. Many VCs are
only seeking to make a fast, high-return payoff and may pressure the company for a quick
exit.
Types of Venture Capital
Venture capital can be broadly divided according to the growth stage of the company receiving the
investment. Generally speaking, the younger a company is, the greater the risk for investors.
The stages of VC investment are:
• Pre-Seed: This is the earliest stage of business development when the founders try to turn an idea
into a concrete business plan. They may enroll in a business accelerator to secure early funding and
mentorship.
• Seed Funding: This is the point where a new business seeks to launch its first product. Since there
are no revenue streams yet, the company will need VCs to fund all of its operations.
• Early-Stage Funding: Once a business has developed a product, it will need additional capital to
ramp up production and sales before it can become self-funding. The business will then need one or
more funding rounds, typically denoted incrementally as Series A, Series B, etc.
The Venture Capital (VC) Process
The first step for any business looking for venture capital is to submit a business plan, either to a
venture capital firm or to an angel investor. If interested in the proposal, the firm or the investor must
then perform due diligence, which includes a thorough investigation of the company's business model,
products, management, and operating history, among other things.
Since venture capital tends to invest larger dollar amounts in fewer companies, this background
research is very important. Many venture capital professionals have had prior investment experience,
often as equity research analysts while others have a Master in Business Administration (MBA) degree.
VC professionals also tend to concentrate on a particular industry. A venture capitalist that specializes
in healthcare, for example, may have had prior experience as a healthcare industry analyst.
Once due diligence has been completed, the firm or the investor will pledge an investment of capital in
exchange for equity in the company. These funds may be provided all at once, but more typically the
capital is provided in rounds. The firm or investor then takes an active role in the funded company,
advising and monitoring its progress before releasing additional funds.
The investor exits the company after a period of time, typically four to six years after the initial
investment, by initiating a merger, acquisition, or initial public offering (IPO).
Why Is Venture Capital Important?
Innovation and entrepreneurship are the kernels of a capitalist
economy. New businesses, however, are often highly-risky and
cost-intensive ventures. As a result, external capital is often
sought to spread the risk of failure. In return for taking on this
risk through investment, investors in new companies are able
to obtain equity and voting rights for cents on the potential
dollar. Venture capital, therefore, allows startups to get off the
ground and founders to fulfill their vision.
Buy now, pay later (BNPL) is an alternative payment method that allows
customers to purchase products and services without having to commit to
the full payment amount up front. In doing so, customers have the ability to
immediately finance purchases and pay them back in fixed installments over
time. For example, a customer making a $100 purchase could pay for the
item in four interest-free installments of $25.
Buy now, pay later services—such as Affirm, Afterpay, and Klarna—are
used by a wide variety of businesses, especially ecommerce retailers, to
increase conversion, increase average order value, and reach new
customers. Businesses that accept buy now, pay later services on Stripe
have seen a 27% incremental uplift in sales volume. These payment
methods offer customers the ability to immediately finance purchases and
pay them back in fixed installments over time.
You, as the merchant, receive the full payment of the item up front, minus any fees (just
like a credit card payment), and don't have to manage the financing. The buy now, pay
later providers take on the task of underwriting customers, managing the installments,
and collecting payments, so you can focus on growing your businesses.
Buy now, pay later services are typically presented as an option in the payment
flow, alongside credit cards and other payment methods. When customers
make a one-time purchase, they simply select a buy now, pay later provider in
the payment form, and are redirected to the provider's site or app to create an
account or log in. Customers choose whether to accept the terms of the
repayment plan—typically selecting bi-weekly or monthly installments—and
complete the purchase.

Once the purchase is complete, businesses receive the full payment upfront
(minus any fees). Customers pay their installments directly to the buy now, pay
later provider, often with no interest and no additional fees when they pay on time.
As long as customers are careful not to overspend and continue to make payments on time,
most buy now, pay later payment methods shouldn’t significantly impact a customer’s credit
score.
However, credit scores may be impacted if providers run a hard credit check or if a customer
fails to make payments on time.

Buy now, pay later services generate revenue by charging fees to both customers and
businesses. Business fees will depend on the provider, but will normally include a fee for
the initial setup process and a fixed fee for each transaction. Customer fees are
generally related to interest charges or late fees for missing payments.
• Get paid up front and receive protection from repayment risk and fraud: You receive the total
transaction amount up front, immediately—whether or not the customer successfully pays their
installments. This means that buy now, pay later providers take on all the customer risk, shielding
your business from fraud. If a customer does file a fraud-related dispute, the buy now, pay later
provider takes on the risk and any associated costs.

• Reach more customers: Offering a variety of payment methods allows you to create a relevant
and familiar payment experience, helping attract more customers. Buy now, pay later options are
particularly popular among younger customers who often don’t have a credit card: more than 26% of
millennials and almost 11% of Generation Z shoppers used buy now, pay later services to pay for
their most recent online purchases. Buy now, pay later services also have established marketing
channels, such as their shop directory and email marketing, which may provide additional
opportunities for you to reach new customers.
• Increase conversion: Customers are more likely to make a purchase, especially a large one, if
they can pay for the item over time. Buy now, pay later services help reduce the sticker shock—it’s
less intimidating to make four, interest-free payments of $50 than one $200 transaction with a credit
card with interest continually accruing.
• Offer a better customer experience: Buy now, pay later payment services offer
customers a faster, more convenient way to access financing. Customers are only subject to
a soft credit check (versus a hard check for other financing methods). There are no separate
applications, application fees, or additional processing time, and most providers have
simple-to-understand repayment plans and terms. Returning customers can also check out
with ease, completing the payment flow in just a few clicks.

• Boost your average order value: Buy now, pay later services remove the barrier to larger
purchases, allowing customers to break up the payment over time to fit within their budget. For
businesses that sell lower-priced goods, customers may be more likely to purchase additional
items once they learn they can pay the total amount over time.
 CLASSROOM ACTIVITY

• Discuss some best Buy Now, Pay

Later Apps of 2023
 Microloans

Microloans are short-term loan, generally with a smaller loan amount that can be availed
by startups, micro-enterprises, self-employed individuals, and small business owners with
low capital requirements. It is a type of small or microfinance offered to small-scale
entrepreneurs or low-income group families who have minimum or almost no access to
financial or lending institutions.
RBI with the help of the Government of India has launched several initiatives to connect the
unbanked and under-banking individuals or groups to the formal credit system. The
government of India aims to provide them with the type of funding that they are looking
for, in partnership with private limited companies and Micro Finance Companies(MFIs). The
most popular micro-lenders after MFIs and private limited companies are NGOs.
 Microloans

Objective of Microloans
Its main objective is to encourage socio-economic development
among unbanked and under-banked entrepreneurs and families. It
also aims to promote Self-Help Groups (SHGs) and contribute
towards the economic development of the country. It will pave the
way in supporting women entrepreneurs across the nation.
Microloans also known as microfinance are also offered by
National Bank for Agricultural and Rural Development (NABARD),
supported and sponsored by the Government of India.
 Microloans

Who can take microloans?

Microloans can be majorly availed by:
• Retailers
• Self - employed individuals
• Traders
• Sole proprietorships
• Startups
• Manufacturers
• Women entrepreneurs
• Consultants
• Unemployed individual
• Minimum wages workers
• Minorities, etc.
What is the purpose of microloans?

People who find it difficult availing traditional bank loans often opt for
micro-loans or micro-financing. Microloans were curated for various
business-related activities such as:
• Starting a new business venture
• Maintaining everyday cash flow
• Meeting working capital requirement
• Debt consolidation
• Managing day-to-day expenses
• Paying salaries to staff, etc.
How to apply for a microloan?
Borrowers can visit the official website of the MFI (Micro Finance
Institution) of their choice and fill in the loan application form and
submit with the required documents to avail microloans. An MFI
representative will contact you after reviewing your loan application
and shall run through the loan formalities with you. Once all the
documents and formalities are fulfilled then your loan amount shall
be disbursed in your bank account.
Anyone in need of funds can apply for business loans from private
and public banks or NBFCs. The interest rates offered by banks and
NBFCs are comparatively lower than Microfinancing Institutions.
Normally borrowers with very low credit scores or no credit history
apply for micro loans.
What are the documents required for Microloans?
Documentation for availing microloans varies from lender to lender,
the following are the documents that are usually needed:
• Proof of office address
• Passport-size photos of the applicants and co-applicants
• PAN card, copy of Passport, ration card
• Updated application form
• Certified copies of AOA/MOA/Partnership deed
• Track record of repayment (credit report)
• Audited financials of the previous 2 years
• Bank account statements for the past 6 months
• Proforma invoice for the equipment that is to be financed
• For lawyers, CAs, architects, and doctors - Professional qualification
certificates
 CLASSROOM ACTIVITY

• Discus the various popular

Microloans in India and make a
comparative study.