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Local financing in rural areas

[ Summary ]


Chapter 1:
Local financing - needs and issues


1.4 Choosing the right financial instruments


Another consideration above and beyond the links between funding supply and demand, is that of the form which financing should take. Fundamentally there are four types of financing:

  • subsidies, donations and lost equity finance, i.e. the definitive provision of funds with no reimbursement obligation;

  • credit, i.e. the provision of funds for a given period at a predetermined interest rate;

  • guarantees, i.e. accepting the risk so as to facilitate access to a loan from a conventional financial institution;

  • equity participation, i.e. investing equity capital into a project, the returns on which are determined by the success of the project.

Each of the above types of funding provides for an infinite range of possible financing formulas, depending on the type of application (levels of co-partnership, interest rates, deadlines, forms of monitoring, etc.). And each particular type of application has its advantages and disadvantages, which must be evaluated in order to make the right strategic choices.

The following table briefly summarizes the main advantages and drawbacks of each of the four funding types.


Advantages and drawbacks of the four most common types of funding

Subsidies and lost equity donations Credit (with/without ethical requirements) Guarantees Equity participation
Cases where it is better to use this type of financing Collective projects with a social or ethical aim; high-risk innovative projects; projects by young people and other groups in difficulty; Third World projects Projects with a commercial aim; investments in businesses that meet ethical criteria (ethical ratings) Any investment project by structures belonging to a collective guarantee project To boost territorial solidarity
Specific advantages Make it possible to restore the balance in terms of access to resources, even at territorial level Relationship that can be built up over the long term Ability to negotiate with banks; guaranteed access to credit; collective approach and, in most cases, assured project follow-up To strengthen local links and confidence in the area’s future
Disadvantages Can sometimes encourage a lack of social responsibility Terms are ill-matched to the specific needs of applicants; limitations in the case of certain projects, especially those with a social aim Risk of failure Time to build up trust and to secure capital for investment and rotation
Fund providers Public players at various levels, public/private partnerships Banks (traditional, ethical) Cooperatives and guarantee funds Local savers, local business firms


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