Monday, October 5, 2009

Rent-to-Own

What is Rent-to-Own?

I've started a little project called "RENT-TO-OWN" where I rent stuff to people until they own it. Seems so simple that I can't believe no one else is doing it.

Its founded on the belief that the two biggest constraints for a business to grow in rural Zambia are Capital and Knowledge. Unfortunately right now the culture of most people in Zambia holds a belief that all loans are 'soft' loans and if you have a good excuse not to pay it back, then you don’t actually have to pay it back, and most people don’t have any collateral to collect either. And in an environment such as rural Zambia, everyone has a good excuse. Its just a fact that relatives die, they leave kids behind that need to be looked after, parents and siblings get sick and require money for treatment. If I were to loan capital in the form of cash - I'd never be able blame anyone for giving the money for something else. That’s why I think renting the required capital can work. If the person renting continues to rent for a long enough period, then they become the owner of the equipment they're renting.

Update

I have hired a friend to be my agent in Mwinilunga. So far there are 8 people interested in renting from us and we'll be choosing two of them before the end of this month. As well, we've decided to work with both those who do have some collateral and those who don’t. Originally I thought we should only aim for those with no collateral, but then realized that social benefits could come to the community from both types of entrepreneurs. I figure we're just learning so why not try a one of each to start.

I've pasted the RENT-TO-OWN agreement below for those who are interested. You'll notice there is an effective 15% interest if the person successfully completes the contract. (10% upfront and 5% in the end) Some people feel this is too high, but when you compare it to what's available, 50% per month is not unusual, then it looks too low. Truth is that business in rural Zambia is extremely difficult. Imagine no power, no cell phones and terrible roads - then add on the cultural norms. That 15% can be chewed up very quickly. Chances are it could run sustainably at somewhere around 25% interest not including my time, so I'll look to subsidize the loans by about 10 - 15% to make up the difference.

The whole point is to turn money over and help create more efficient and productive businesses.

I'll be posting updates on how it goes here on my blog, including profiles of the people we end up working with, the equipment they rent and how its affecting their business.

-------------------------DRAFT COPY ONLY -----------------------

A RENT-TO-OWN BUSINESS AGREEMENT

BETWEEN

Mark Hemsworth (THE OWNER)

AND

NAME OF ENTREPRENEUR (THE OPERATOR)

This Business Agreement (the "Agreement") is made by and between Mark Hemsworth of 34 Lutuba Road, Roma Township, Lusaka and NAME OF ENTREPRENEUR and ADDRESS OF ENTREPRENEUR (the parties).

The parties agree to the following terms and conditions;

SETUP

The OWNER will purchase a name of machine (the asset) and rent it to the OPERATOR for xxxxx ZKW per week. The full value of the asset including delivery is xxxx ZKW.

The OPERATOR has paid 10% (xxxxx ZKW) of the value of the asset in advance. This is a one-time fee for setting up the contract.

Upon receiving the asset, the OWNER agrees to train the OPERATOR on the correct actions for maintaining the asset and operating the asset. The OPERATOR must understand this training completely before using the asset.

PAYMENT SCHEDULE

The OPERATOR agrees to pay the rental payment on the following days. The OPERATOR will be given a book in which all transactions are recorded and both parties are to sign and date each transaction for good record keeping. The payments are to be made to the OWNER at the location of the asset.

October 7

October 14

October 21

October 28

November 4

November 11

November 18

November 25

December 2

December 9

December 16

December 23

December 30

January 6

January 13

January 20

January 27

February 3

February 10

February 17

February 24

March 3

March 10

March 17

March 24

March 31

POSSIBLE SCENARIOS

1. If the OPERATOR rents the asset for xx weeks straight as outlined in the payment schedule, and pays full rental fee of xxxx each week, then the OPERATOR has the right to purchase the asset for 5% of its original full value, which is xxxxx ZKW. Upon receipt of this purchase fee payment, the OWNER agrees to end this contract successfully and the asset now belongs to the OPERATOR.

2. If the OPERATOR can’t pay the full amount on time, the OWNER must give 7 days’ extra to deliver the money if this is the first time payment has been late. If the money is received before 7 days, the contract continues. If payment is still not received, scenario #3 occurs.

3. If the OPERATOR can’t pay the full amount as the schedule indicates, and the OPERATOR has been late before, then the OWNER has the right to take the asset away from the OPERATOR and end this contract in failure without any further payments to the OWNER. As well, the OWNER doesn’t pay back any of the rental payments or the 10% starting fee.

4. If the OPERATOR loses the asset, the OWNER and OPERATOR will launch an investigation with the police in hopes that the asset can be retrieved. The OPERATOR continues to pay the weekly amount owing until all scheduled payments have finished and the 5% purchase fee is paid, at which time the contract is ended successfully.

5. If the asset breaks down, it must be repaired. The OPERATOR is to report the breakdown within 24 hours. The OWNER is obligated to repair the asset as quickly as possible. While the machine is being repaired, all rental payments are paused until the asset is back to the OPERATOR and is working properly. The full cost of the repairs is split between the OWNER and the OPERATOR.

a. If the OPERATOR cannot pay their half of the repairs within 2 weeks of getting the asset working again, then scenario #3 occurs.

b. If the OPERATOR pays for half the repairs within 2 weeks, the contract continues and that amount of money spent by the OWNER on the repair is added to the 5% purchase fee.

TERMINATION OF CONTRACT

A successful contract results in the OWNER receiving the net amount (the 10%, the cost of the asset, the 5%, plus any cost of repairs paid by the owner) at which time the OPERATOR now becomes the OWNER of the asset. The OPERATOR is now able to use or sell the asset however they see fit. Furthermore, the OPERATOR can apply for a new RENT-TO-OWN asset if they like, and the OWNER will take into consideration the fact that the application is from someone who has demonstrated some credibility.

A failed contract results in the OWNER remaining with the asset and the OPERATOR does not receive their 10% payment fee back or any of the rental payments that have been made. The OPERATOR is free to apply for a new RENT-TO-OWN asset, however, the history and circumstances of the first contract will be taken into consideration. The OWNER has the right to sell, utilize or rent the asset to an operator.

Today’s Date: ___________________________

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized officers.

Signed by

For and on behalf of For and on behalf of

The OPERATOR the OWNER

Name: …………………………… Name: ………………………………

Signature: ………………………. Signature: ………………………….

NRC No. ……………………….. NRC No. ……………………………

Date: …………………………….. Date: ………………….……………

Witness:

Name: …………………………… Name: ………………………………

Signature: ...…………………… Signature: …………………………

NRC No. ………………………. NRC No. ………………………….

Date: ……………...…………… Date:….……………………………

This contract is verified to be an enforceable document by the Zambian Police.

Signed:


3 comments:

Elizabeth said...

Just read through the whole thing. I can't wait to see how Rent-to-Own goes. It sounds like you already have more potential clients than you need to test it out!

JohnPaul Portelli said...

Hey Buddy, sounds good. I like the idea! Good luck!

JP

David I. Levine said...

I am a professor at UC Berkeley. I am also very interested in rent-to-own in poor nations and have a pilot underway for improved cookstoves in Senegal. I'd love to exchange notes. Please email me at levine@haas.berkeley.edu.

cheers,

- David Levine