SME Export Facility (SEF): working capital loans for export orders
The Grassroots Business Fund’s SME Export Facility (SEF) addresses the critical resource constraints faced by social enterprises that support artisans and farmers. SEF encourages economic growth of socially-oriented, export-based businesses by providing loan products to increase sustainability, expand their operations, and increase the standard of living for supported beneficiaries.
About You
About You
First Name
Harold
Last Name
Rosen
Website
Your Organization
Grassroots Business Fund (GBF)
Country
United States, DC, Washington
About Your Organization
Organization Name
Grassroots Business Fund (GBF)
Organization Website
Organization Phone
202-518-6865
Organization Address
1601 Connecticut Ave NW, Suit 501
Organization Country
United States, DC
Organization Type
Non-profit/NGO/Citizen-sector Organization
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Your solution
Name Your solution
SME Export Facility (SEF): working capital loans for export orders
Describe Your Solution
The Grassroots Business Fund’s SME Export Facility (SEF) addresses the critical resource constraints faced by social enterprises that support artisans and farmers. SEF encourages economic growth of socially-oriented, export-based businesses by providing loan products to increase sustainability, expand their operations, and increase the standard of living for supported beneficiaries.
Country your work focuses on
If multiple countries, please list them here. If your solution targets an entire region, please select it below
SEF works with businesses in developing countries, with existing loans in Colombia, Cambodia, Ghana and Tanzania
Region(s) your solution focuses on:
Africa, East Asia and the Pacific, Latin America and the Caribbean, South Asia.
Range of turnover in your target firms, in USD
Less than $1 Million.
Average turnover in USD of your target firm
US$188,571
Number of employees in your target firms
75-99.
Average number of employees of your target firm
85
Specify the size, average and range of expected loans or investments in each target firm
Loans range from US$30,000-US$130,000 with the current average at US$67,000 and the target average from US$75,000-US$100,000
What stage is your solution in?
Operating for 1‐5 years
Innovation
What makes your innovative solution unique?
The facility fills a vital gap in the short and medium-term capital difficulties faced by many crafts and agribusiness enterprises in the developing world. The targeted SMEs suffer from this lack of access to affordable, customized financial services which constrain their growth, and accordingly their ability to generate a social impact.. While similar financial products are available in the market, they are often difficult to obtain by crafts and agribusiness producers. Local commercial banks tend to offer restrictively high interest rates; in some developing regions they also fail to recognize traditional trade finance tools like letters of credit. Banks also tend not to lend to the sector because of perceived high risk. Meanwhile, established trade finance alternatives for social enterprises often require a lengthy vetting process that conflicts with the immediacy of demand and limits availability to organizations fulfilling large-volume orders. This is where SEF’s niche lies: with its financing products and technical assistance, SEF can help eliminate some of the constraints to growth with the idea that the business will in time grow to be large enough to access traditional financing or, at a minimum, longer term financing from GBF or related partners.
How does your proposed innovation leverage public intervention in catalyzing private SME finance?
SEF maintains partnerships with public institutions such as IADB, USAID, other NGOs, and local government affiliates to create networks which support private SME financing both through technical assistance and through leveraging financing. Many of these organizations work with SEF in pipeline development and sector-specific initiatives which are aimed at promoting private financing and furthering the crafts and agribusiness sectors in the developing world to compete in more established markets.
Many internationally funded programs, such as USAID programs like The West African Trade Hub and Compete Africa, were developed to help increase private financing for SMEs. Both of these programs have worked with SEF to source clients and help market the product to businesses that could potentially utilize the funding in the future. As SEF grows there is a large potential to continue and expand these partnerships to create a more global funding platform which can leverage programs and contacts to better connect SMEs to the larger global market through SEF financing.
Other intergovernmental organizations such as IADB have contacted SEF about a future partnership in creating regional financing facilities, which would focus on exporting artisans organizations. This future facility would not only promote indigenous arts but also utilize public and private funds to help foster growth and link businesses to markets through export financing within Latin America. Through SEF’s growth, developing these regional financing facilities would be possible, thus further the creation of private SME private financing options for artisanal companies.
In addition to these international government funded programs, many countries also have local government initiatives to promote certain sectors and increase the export of products. One example is in Cambodia, where there is a government program to increase the rice exports from SMEs to the global market. SEF is currently in contact with some representatives about utilizing this publicly supported program to help connect rice-related SMEs with the necessary financing to enable larger scale export. Through continuing to foster these types of relations, SEF will not only guarantee its expansion within regions but also increase its ability to promote locally supported SME financing and help create local markets to fulfill the needs of SMEs.
What barriers does your proposed solution address?
Asymmetry of information, Lack of financial capacity, Lack of SME access to skills / knowledge / markets, 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
Through SEF, small businesses gain access to financing not otherwise available. Although in some areas working capital financing exists, it typically comes with a high price tag, and with larger collateral requirements. SEF offers working capital specifically designed for smaller export related businesses that usually lack a financial plan, collateral, or the skill set necessary to grow their business beyond its current stage. The product was developed to be time sensitive, which helps reduce the transactional cost and ensure the capital reaches its user in time for order fulfillment.
SEF offers SMEs security options on loans beyond just asset collateral. Since SEF is used to finance specific purchase orders and the total amount of the order always exceeds the SEF loan amount, using direct payments from buyers is an easy way to ensure repayment without requiring a large asset base. In this case, the SME does not receive any revenue from the purchase order until the SEF loan has been fully repaid, thus incentivizing them to fulfill the order with necessary quality and time standards. Another security option is automatic transfers from banks. In this case, SEF users, SEF, and the user bank would have an agreement in which specific incoming payments would automatically be transferred to SEF, in order to repay the loan.
SEF also customizes technical assistance plans to help improve the skill set of each SME, which typically focus on financial management and quality control processes. With previous clients, SEF utilized local consultants to train managers on supply chain management and quality assurance, allowing the businesses to maintain a standard level of quality, which in turn has the potential to lead to larger orders from the buyers in the future. SEF has also developed management dashboards for some companies, which focus on monitoring the key drivers of a business and financial planning for upcoming orders.
In order to counteract a high transaction cost, SEF utilizes a regional approach, in which local coordinators are used. They are paid a low retainer fee and then a percentage of re-flows received from their clients. This incentivizes the coordinator to develop a pipeline for investment, and to monitor and train the managers of the company well, to ensure they are able to fulfill purchase orders on time and repay their funds. In addition, because SEF requires a high level of security over actual purchase orders and a track record of successful order fulfillment, the level of due diligence on the company and its managers is decreased. Instead of a lengthy process, SEF requires only a short application for approval and a few necessary checks. A field visit and non-essential information are not required, cutting down on the costs associated with the transaction.
Impact
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
In order to gauge the effectiveness of the Client Incubator Facility, the Grassroots Business Fund initially conducted a pilot program, identifying two clients in whom to invest. In the 18 months since GBF launched SEF, the performance of these organizations and their loans have been tracked.
The first organization that GBF selected to receive a SEF Loan was SURevolution, an organization that designs and sources crafts and home décor products from an artisan supply base throughout Colombia, Peru, Bolivia, India, South Africa, Cambodia and Indonesia, composed primarily of indigenous workers. Through its work, SURevolution efficiently connects these workers in developing countries with high-end wholesale buyers in the developed world, while providing technical assistance services to the artisans. SEF provided SURevolution with a one year revolving credit purchase order of US$130,000, through which it was able to facilitate orders more quickly and easily to its artisans and producers.
The second organization selected for the pilot program was United Holding, a company that utilizes raw materials found in rural Cambodia, such as water hyacinth, and creates market ready furniture products for wholesale. United Holding hires Cambodian workers in its factory, and also utilizes weavers and farmers from Kandal villages to create products for sale. United Holding received a US$40,000 factoring loan to assist in the fulfillment of an order with IKEA.
The pilot phase of SEF was very successful in terms of financial performance and shows the potential for high returns with the growth of the portfolio. Of the US$170,000, the total loans disbursed since the inception of SEF, principal reflows for SEF equal US$40,000 and the total income from interest and fees amounts to US$7,983. By the end of September, 2009, United Holding had already fully repaid its loan plus the additional interest; SURevolution is current on its interest payments.
The pilot phase also demonstrated the capacity of SEF to expand its client business’ operations. United Holding’s initial SEF loan covered a purchase order of US$280,000 from IKEA. Through SEF’s financial and technical assistance, United Holding’s purchase order impressed IKEA to the point where they placed an increased order of US$400,000 worth of product the following year.
Due to the success of the pilot program, SEF has expanded its portfolio to include an additional 6 clients, in both the artisanal and agricultural sectors. GBF is confident that connecting impoverished workers to export markets through SEF Loans will continue to be an effective way to realize both social and financial returns. SEF has now committed US$608,000, with US$465,000 already disbursed.
How many firms do you expect to reach?
Because SEF is a revolving fund, there is effectively no limit to how many firms it can reach. As SEF’s total pool of capital expands, so will the number of firms reached. However, looking at the short term, by June 2011 SEF aims to have impacted over 10,000 direct beneficiaries.
What is the volume of private SME finance you aim to catalyze?
The target SEF loan size is approximately US$75,000; the current portfolio average is US$67,000. The length of each loan facility, which will be structured to most optimally meet each client’s needs, will ultimately determine the total volume of SME financed over a given time period.
What time frame will be required to reach these targets?
By June 2011, SEF hopes to reach over 10,000 artisans and farmers directly and have over US$750,000 outstanding portfolio. The goal is to obtain an outstanding portfolio of at least 90% of available capital year over year.
Does your solution seek to have an impact on public policy?
No
What would prevent your solution from being a success?
SEF’s results thus far suggest that on a conceptual level, SEF ought to continue to be successful. However, in its existing form SEF aims to have approximately 10 clients at any given time, a portfolio small enough that a consecutive string of poorly identified clients at a given time could be damaging to SEF as a whole. While thus far, none of SEF’s clients have ever failed to make a repayment, if 3 or 4 were to default on their loans at any given time, the total amount of capital available to SEF would shrink. If this were to happen, SEF would still be able to operate, though it would necessarily be on a smaller scale, meaning the social impact of SEF’s work would be less substantial.
Other failures in the vetting process might also prevent SEF from being successful in its aim, that of providing economic opportunities for poor workers in developing countries. If a SEF client’s products do not meet a particular quality threshold, these organizations will likely not receive export purchase orders in the future. Also, if SEF does not identify organizations that are actually working with the poor, the point of SEF is effectively lost. In both of the aforementioned instances, SEF could continue to operate, as it would still receive repayments, but for the particular business, the mission of benefiting the poor would have been lost.
This Entry is about (Issues)
Describe the social impact of your innovation. Please include both numbers and stories as evidence of this impact
Thus far, SEF loans have led been distributed to 8 clients. The Grassroots Business Fund’s social metrics team has determined that in total 4,500 employees and workers in developing countries have benefited thus far from SEF, receiving over US$370,000 in payments from their employers, numbers that will continue to increase as SEF’s funds revolve. These payments to workers are also significant in that they are often paid to workers in rural areas, who are not connected to international markets. The payments received will have a multiplier effect, as they will continue to be spent in the local economies.
SEF Loans have impacted the organizations and workers in several significant ways. By making it possible for organizations to complete larger purchase orders, they are able to employ more people to accomplish the order. The loans also mean that the producers can afford to pay its workers fair wages in a timely fashion. Finally, some of the SEF clients provide technical assistance and training to its workers, which provides them with skills that can help them improve their earning potential in the future.
On a more micro level, SEF has a social impact in the lives of people like Peng Dountry. Peng has been a weaver and a community production controller at one of the United Holding Kandal villages for about 9 years. She earns 50 USD a month from United Holding for her production control work and makes extra income of between 80 USD- 120 USD from her weaving. With this income, she can now afford medical help for herself and her family and is able to send her child to school.
Sustainability
List all the funding sources that are required for the sustainability of this solution
Currently, the way the facility is designed, capital for financing is only required for expansion of the facility due to the fact that it is a revolving facility. However at the current financing level, SEF requires additional funding for grant based technical assistance and a small subsidy from GBF to cover staff related costs. As the facility expands this additional capital requirement will decrease for operational costs, but will still be required for additional technical assistance grants should those continue.
Demonstrate how your proposed solution has the capacity to graduate from dependence on public finance. What is the time frame?
SEF currently requires additional capital for expansion into new regions and in order to reach more SMEs in current regions. Initially this capital will likely come from public financing institutions, however as facility expands, and becomes more operationally efficient, SEF will be able to fund itself through repayments.
Given the nature of a revolving facility, SEF relies on a low defaults rate to maintain adequate repayments of loans. It is also essential that the capital is continually used and an almost full revolution of all capital each year occurs to maintain its operations. In the first year of SEF, almost full disbursement of the funds has occurred and a large enough pipeline has been developed to ensure a revolution of funds in the upcoming year. Once this revolution occurs SEF should be able to cover a larger percentage of its operational costs with loan repayments.
By reviewing, SEF’s financial projections, it was determined that with an average loan of USUS$75,000 and with the projected level of efficiency (one month processing for each loan), SEF will be able to fully fund its operational costs without being dependent on public financing each year. If the average loan size increase to closer to USUS$100,000, SEF will be able to finance its loan relations operational costs and some small grants. Given the current pipeline and the current average loan size of USUS$67,000, SEF should be able to reach the US$75,000 average in the coming year and therefore be one step closer to financial independence (pending no expansion).
Depending on future expansion and the size of future clients, SEF should reach its independence in the next 2-3 years.
Demonstrate how your proposed solution will survive a potential loss of its largest private funding source
Given the flexibility of the SEF product and the overall facility, a loss in capital from a large funding source could affect SEF in two ways. One would be that the facility would continue operating at current levels and the second would be that the facility would need to scale back.
In the first scenario, the funding source would not remove funds but rather cease to provide additional funds. In this case SEF could continue operating at that current level, funding itself on revenues from loans. The only decrease in the capital base would be from insufficient operating funds or from default. As illustrated before, once SEF reaches its sustainable level of loan size and operational efficiency, the facility could continue endlessly.
In the second scenario, where a investor would pull their capital from the main funding base, SEF would be required to scale back its operations. This would mean being more selective with clients, reducing the number of active regions, or decreasing the amount of technical assistance provided, until replacement financing could be found. Again, as long as repayments are received and efficiency remains high, SEF would continue operations.
Please tell us what kind of partnerships, if any, could be critical to the greater success and sustainability of your innovation
An essential element of SEF’s success is its ability to quickly and effectively screen applicants, as such a process is necessary if organizations are to receive the working capital in a timely fashion. As a result, it is critical that SEF have local partners that can recommend businesses to them. While SEF is ultimately responsible for screening the applicants, it is often SEF’s local partners who connect the SMEs to SEF in the first place. Also, in instances where GBF does not have a presence on the ground, partnerships with locally-based social investors and other like-minded NGOs can ensure that SEF has direct, local contact with every loan it extends. SEF’s partner organizations can also provide funds for technical assistance in collaboration with SEF. Finally, through collaboration with NGOs and Social Investors, SEF can share and learn best practices, further developing its knowledge leadership in the field.
Are there non-financial issues that could threaten the sustainability of your proposed solution?
There are risks to any innovative solution when dealing with SMEs. Other than financial risks, SEF could face issues of socially or environmentally irresponsible clients, loss of team knowledge, or changes in local government regulations..
Since SEF was developed to support fair trade minded craft and agribusiness exporters, if it is determined that a SEF client does not meet international or local standards, it could jeopardize the facility’s reputation in the market place. SEF requires that all users either have a certification, such as fair trade, or that the potential client file a self-audit which contains a series of questions on ethical practices. In addition to the self-audit, a short site visit is usually conducted. SEF also requests references and vets client for past issues. This helps ensure that each client maintains a certain level of social and environmental ethical standards.
SEF could be threatened by a lack of knowledge management. Should the core team involved, depart the organization, there could be a potential lack of know how in operating the facility at the necessary level of efficiency for sustainability. To help mitigate this risk, SEF has a well documented manual on how to conduct due diligence, process and monitor loans. This manual can be used by any new members of the team and acts a guidance even if not accompanied by other team members.
Changes in local regulations also but SEF at risk. To identify changes in regulation, SEF uses the knowledge of local partners to determine if further research is required. If there were to be a regulation which no longer allowed SEF to operate in a country or sector, the financial sustainability could be temporarily at risk, as new pipeline or clients would need to be identified to fill the gap in the portfolio.
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
SEF aims to scale its operations on a geographical basis, with an intimate knowledge of businesses in each of the regions where it invests. At this point in its operations, SEF has loans in Ghana, Tanzania, Cambodia and Colombia. In each of these four countries, the Grassroots Business Fund also has non-SEF loans in the country. Through this regional approach, SEF has been able to leverage GBF’s partnerships with local firms and organizations to effectively target businesses with both a proven track record, and a strong social impact. Additionally, GBF’s staff is aware of the legal regulations and local conditions that affect the nature of each investment. As SEF continues to extend loans, for the time being, SEF will target businesses either in one of these four countries, or in other countries where GBF has invested, so that GBF’s partnerships and acquired knowledge can continue to be most optimally utilized.
As SEF’s portfolio continues to develop, the SEF loans will expand to other countries, though efforts will be made to remain in areas where GBF has a developed knowledge of the investment environment. Practically speaking, this means that SEF will aim to create regional hubs. In each hub, GBF will have staff members with an expertise in the region. They will be familiar with the major businesses in the region, and will have developed an intimate relationship with partner organizations. SEF is currently progressing to this stage of operations -- SEF currently has a full-time staff on the ground in Ghana. This staff member has an established relationship with the West Africa Trade Hub, and has held discussions with potential clients in the region. While SEF’s existing loans in West Africa have all been to businesses in Ghana, the SEF staff have also considered clients based in Benin, Togo, Senegal, Mali, Burkina Faso and Liberia. SEF expects similar expansion efforts to take place in Southeast Asia, potentially to Laos and Indonesia, in Latin America to Peru and Bolivia, and potentially in East Africa as well.
In total, the market for fair trade products is over US$2.6 billion. The magnitude of this sector means that SEF does not have to immediately consider entering into new sectors, or investing in regions where it does not have expertise or established partners. Instead, the most prudent way for SEF to expand the scale of its impact is through the development of regional hubs, and deliberate expansion into countries where it is well-informed. With the size of the sector, and the number of SMEs who could benefit from SEF loans, SEF can still be confident that it will be able to scale its operations to positively affect a large number of beneficiaries.
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 | 89 weeks agoHarold Rosen updated this Competition Entry. |
| 89 weeks agoHarold Rosen submitted this idea. |
