Overcoming the SMEs Financing Challenge through collaborative public-private – SME partnership

Government provide the access to finance by applying direct injection of capital to SMEs using a system whereby each firm cannot receive more than three (3) years financing and private venture fund after the third year.

About You

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About You

First Name

Paulette

Last Name

Perry-McLean

Your Organization

PAGIEL INSTITUTE

Country

Jamaica, MAN

About Your Organization

Organization Name

PAGIEL INSTITUTE

Organization Website

Organization Phone

876-963-8244

Organization Address

Unit 28A, Mid Way Mall, 17 Caledonia Road, Mandeville

Organization Country

Jamaica, MAN

Organization Type

Private Institution

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Your solution

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Name Your solution

Overcoming the SMEs Financing Challenge through collaborative public-private – SME partnership

Describe Your Solution

Government provide the access to finance by applying direct injection of capital to SMEs using a system whereby each firm cannot receive more than three (3) years financing and private venture fund after the third year.

Country your work focuses on

Jamaica, MAN

If multiple countries, please list them here. If your solution targets an entire region, please select it below

North and Latin America and the Caribbean

Region(s) your solution focuses on:

Latin America and the Caribbean, North America.

Range of turnover in your target firms, in USD

$1-5 Million.

Average turnover in USD of your target firm

US$1.5M

Number of employees in your target firms

5-24.

Average number of employees of your target firm

10

Specify the size, average and range of expected loans or investments in each target firm

The maximum loan for micro enterprises in year 1 is $0.5M, year 2 = $0.3M, in year 3 = $0.2M.
The maximum loan for small enterprises in year 1 is J$2.5M, year 2 = J$1.5M, in year 3 = J$1.0M. The maximum loan for medium-sized enterprises in year 1 is J$5.0M, year 2 = J$2.5M, in year 3 = J$1.25M.
In year 4 the SME should be looking for venture capital and to provide growth capital depending on the level success of the firm.

What stage is your solution in?

Idea phase

Innovation

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What makes your innovative solution unique?

Many small and medium enterprises in Jamaica are family-owned with the more affluent owning the larger establishments. Many of these entities fell as the Jamaican financial landscape collapsed in the 1990s. This financial crisis meant that those who embarked on SME operations were heavily scrutinized as their operation were seen as contributing to the rapid decline in the financial sector: loans were said not to be “at arm’s length.” These challenges made it harder for SME to get funding and very little were done to embrace and advance SME financing.
The lack of proper SME financing is now a public health problem in Jamaica. The situation is so grave that when SMEs really get financing the rates are close to 53% per annum. SMEs are, therefore, challenged to operate and will require more direct government capital injection to move it to the next developmental phase. SME financing must accomplished four objectives: providing loans to SMEs to build (1) potential growth in the economy (2) good credit, (c) trust in the SME sector that will stem the liquidity problems and stem deteriorating asset quality. There is urgent need to provide liquidity to SMEs with financing needs by contributing special funds in the amount of 100 billion Jamaican dollars as direct injection into the sector or as a Credit Guarantee Fund and making it available to SMEs. This idea is both innovative and creative as although venture ideas have worked before in Jamaica, it has never worked at this level of magnitude.

How does your proposed innovation leverage public intervention in catalyzing private SME finance?

Government provide the access to finance by applying direct injection of capital to these SMEs using a system whereby each firm cannot receive more than one time financing if the firm does not survive in its first year of operation; two time financing for the second year; and angel/investor/venture funding if the firm survives after the third year. The government entity operating the scheme should be specifically related to SME financing and should be under the ambit of the ministry of commerce and supervised by the central bank or the central government banking or finance entity responsible for such operations.
This idea has never been explored before. However, similar idea minus the government capital injection has been explored before and met a high degree of success for one firm in the financial sector. Other firms have been borrowing from larger financial entities and subletting to micro businesses. Thus, with Government giving tax credit to these firms, then it would encourage more direct investing into these smaller firms.

What barriers does your proposed solution address?

Lack of collateral, Lack of financial capacity, Lack of SME access to skills / knowledge / markets, Unavailability of financial products tailored to SME needs, Lack of competition / incentives for financial intermediaries to serve SMEs, Underdeveloped local capital markets (term local currency funding, exit options for SME equity), General barriers to SME development related to investment climate.

If you checked any of these barriers, describe how your solution addresses them

The major advantage about this program is that the government will get an avenue to assist SMes knowing that the system would work much better than it is currently working and that SMEs could easily get access to the investment they need to solve their liquidity problems. Also, weaker SMEs would be assured of a helping hand with the assurance that they could continue in business for at least 3 years without having to worry too much. These SMEs would also be assured that if they are successful within that 3-year period then they could get financial and management help from others who do not intend to own a portion of their business permanently but for a short period and as such, these investors also have an interest to help them succeed.
This proposal, if instituted would help to sure up weak SMEs and promote prospective SMEs to take up the entrepreneurial challenge while urge medium-sized businesses to make the entrepreneurial transition into larger corporations. Ultimately, it would boost Jamaica’s current entrepreneurial horizon and change the financial landscape, making commercial banks and other financial houses rethink how they handle policies relating to businesspersons.

Low interest financial support
Since the government capital injection the first year is free but in the secon year the SME has to repay the capital at low cost, then it makes the operation more viable and so the SMEs are better able to cope with low interest rates. After the first three years, the investment could be in the form of private stocks or shares. The capital would be interest free only to be recouped later in the form of earnings per share. The investment is therefore not risky for the firms as these venture capitalists would be willing to share in the firms’ progress.
Management Support
The proposal calls for venture capital in the form of monetary and management support. This gives the SMEs leverage to take both financial and non-financial assistance without having to outlay the capital themselves. These assistances could be claimed later as the investors help to take these firms into listed firms at the time of extracting their capital so that others could start publicly investing in these firms.

Impact

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Provide empirical evidence of your proposed solution's success/impact at present. If your project is in the idea phase, please provide evidence that speaks to its potential impact

This idea has never been explored before. However, similar idea minus the government capital injection has been explored before and met a high degree of success for one firm in the financial sector. Other firms have been borrowing larger financial entities and subletting to micro businesses.
Venture capital operations have been very beneficial in Jamaica in the past. The Jamaica Money Market Broker – JMMB is one such invention. The Braco Hotel (Rio Bueno, Jamaica) is another venture capitalist intervention that has made it. These venture capitalists have been able to recoup their investment many times over by either taking the firm public or taking their share of the profit. Also, some of these firms continue to enjoy low cost financing by giving their employees shares in the companies. A recent 2007 study of two Jamaican firms that started out small and have grown to be leaders in their business sector found that:
Technical competence, low financial risk, building a solid capital base, dividend, international benchmarking, technology and interest rate policy were the significant variables in leading these firms to successfully embrace transition and to survive the financial crisis of the 1990s. The results also show that while managers and directors are concerned about building equity, reducing debt and financial risk, shareholders were concerned with increasing wealth, realizing profits, and collecting dividend. The findings suggest that family firms that have gone public have low financial risk (Perry, 2008).
Therefore, if we couple government funding for start-up operation with venture funding then many more SME could get the added boost to positively jolt Jamaica’s GDP and lead it on a path to sustainable growth.

How many firms do you expect to reach?

I expect to reach over 10,000 firms over a 10-year period.

What is the volume of private SME finance you aim to catalyze?

Year 1 = J$100B; Year 2 = J$150B, Year 3 = J$200B

What time frame will be required to reach these targets?

Four years would be required to see the first set of recipients to transition into venture funding.

Does your solution seek to have an impact on public policy?

Yes

What would prevent your solution from being a success?

If the government is not able to provide the funding needed and if the private partnership aspect is not successful.

This Entry is about (Issues)

Describe the social impact of your innovation. Please include both numbers and stories as evidence of this impact

SMEs provide almost 80% of all new jobs in any country. For each SME born there is the potential for at least 5 -10 new jobs created. For each new business generated it brings new implications the specific community within which the SME is located: social and economic. This would mean a decline in the social decay now existing in the country as youth feel useless and have turn to crime and violence which in turn has labeled Jamaica as one of the murder capitals of the world. If youth see more positive alignment with education and creating a business for themselves rather than the high competition for the very few jobs that now exist in the country, then they would be less enthused by the predictable end that drugs and crime and violence presents.
Additionally, more productive entities will be established as people see more help coming from the financially affluent. This could bring more trust of the higher echelon of the society and more trust in government as government’s role becomes less onerous and private and civil society move more to advance the youth by creating more leadership programs to support them in their quest to become financially independent and more socially concerned.

Sustainability

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List all the funding sources that are required for the sustainability of this solution

The funding sources are:
1. Government in the first instance.
2. Private individuals and firms.
3. The SMEs’ own start-up capital.

Demonstrate how your proposed solution has the capacity to graduate from dependence on public finance. What is the time frame?

The program has a matching segment where potential investors are asked to review the firm’s operation and with a view to potentially invest in its operation. The SME would then have a strong interest to ensure that it remains viable if it wants the venture capitalist support.

Demonstrate how your proposed solution will survive a potential loss of its largest private funding source

The SME starts off with the knowledge that it cannot receive public financing after 3 years. During that period it would be carefully monitored and evaluated while receiving management, marketing, accounting and other essential assistance which would come as a condition of the public funding. Thus, no SME would qualify for funding after three years. Additionally, the program has a matching segment where potential investors are asked to review the firm’s operation and with a view to potentially invest in its operation. The SME would then have a strong interest to ensure that it remains viable if it wants the venture capitalist support.

Please tell us what kind of partnerships, if any, could be critical to the greater success and sustainability of your innovation

The kind of partnerships that would work is: public sector – SMEs – private Individuals and larger private firms such as financial houses.
In this partnership the government would lead off and provide security for the SME for the first few years of its life making it more feasible to continue business in the first few critical years of a firm’s life. This approach will help to weather the storm and help to lessen the challenges in the most critical years. Then with more stability, both the SME and the potential venture would be more confident of having a successful venture to work with.
The venture capitalist should understand the role he/she will be playing and that this type of venture is investment with uncertainty of return. Thus, how the venture capitalist assist in guiding the operation through the board or management expertise is critical to getting positive returns on his/her investment.

Are there non-financial issues that could threaten the sustainability of your proposed solution?

There would be a need for management, marketing, R&D and accounting/financial support. These are where the SMEs tend to be weakest and tend not to survive after 5 years. If these are instituted from the start of the operation where a mechanism is in place to provide these kinds of support preferably under a collective umbrella so as to lessen operational costs then the SME would be better able to sustain it.
Cohesion between the SME and the private partner could pose some challenges. This is a very grey area and will need expert guidance. As such, some of the government funding should be guided in this area. To overcome this challenge the program would need to introduce entrepreneurial education inclusive of funding options: leveraging debt financing vs equity financing. This level of education is important as it allows the SME to be more receptive to having some of these investors and or their experts on the SME board to help guide policies and to monitor the firms with the objective to steer them into financially sound entities.
The SME has to be educated on the benefits and challenges of using venture funds. This would be beneficial as the level of restriction placed on this type of relationship where the SME will be guided by persons other than himself with a vested interest in his/her business can be a challenging experience and the SME might not be able do as he/she pleases with the funds and might have to operate at a different level.

Please tell us if your proposed solution aims to scale up through a high growth sector, expand immediately to multiple sectors, and/or scale up geographically

Ideas are multi-faceted and as such SME takes in all sectors and would not be considered as a single business sector. It is, therefore, expected that the entire Jamaica would be affected even if the project is piloted in a specific geographic area. Additionally, since government gives support to the tourism sector it would not be hard for it to expand its support to SMEs in different sectors. .

212 weeks ago Paulette Perry-McLean updated this Competition Entry.
212 weeks ago Paulette Perry-McLean updated this Competition Entry.
212 weeks ago Paulette Perry-McLean updated this Competition Entry.
212 weeks ago Paulette Perry-McLean submitted this idea.