TREFI ==> scalable SME finance solution without the costs and risks

Competition Finalist

This entry has been selected as a finalist in the
The G-20 SME Finance Challenge competition.

TREFI enables suppliers to finance their SME clients through:
● effective risk management and collection tools; and
● efficient refinance of SME credits

Synergies with the suppliers processes eliminate almost all operational costs.

Using information from suppliers, predictive SME risk ratings are provided and timely payment promoted, substantially reducing risks.

About You

Organization: Capital Tool Company Visit websitemore ↓↑ hide↑ hide

About You

First Name

Rob

Last Name

Grimberg

Your Organization

Capital Tool Company

Country

Netherlands, NH

About Your Organization

Organization Name

Capital Tool Company

Organization Website

Organization Phone

+31 208943448

Organization Address

Amsterdam

Organization Country

Netherlands, NH

Organization Type

Private Institution

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Your solution

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Name Your solution

TREFI ==> scalable SME finance solution without the costs and risks

Describe Your Solution

TREFI enables suppliers to finance their SME clients through:
● effective risk management and collection tools; and
● efficient refinance of SME credits
Synergies with the suppliers processes eliminate almost all operational costs.
Using information from suppliers, predictive SME risk ratings are provided and timely payment promoted, substantially reducing risks.

Country your work focuses on

n/a

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

Benefits SMEs around the globe

Region(s) your solution focuses on:

Africa, East Asia and the Pacific, Europe and Central Asia, Latin America and the Caribbean, Middle East and North Africa, South Asia, North America.

Range of turnover in your target firms, in USD

Less than $1 Million, $1-5 Million, $6-10 Million, $11-20 Million, $21-50 Million.

Average turnover in USD of your target firm

100000

Number of employees in your target firms

Fewer than 5, 5-24, 25-49, 50-74, 75-99, 100-150.

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 solution aims to cover all working capital needs of the SMEs therefore the average size of the credits will depend on country and industry.

For example in Peru the average credit in portfolio is currently $150 compared to average $1165 in Peruvian microfinance. The solution works efficiently for credits substantially smaller than in micro finance!

The size of the credits will increase as the SMEs continue to receive additional credit, the solution aggregates credits from multiple suppliers and SMEs start growing faster.

The smaller the SME the more our solutions methods benefit over alternatives, since operational costs and payment behaviour are more important factor for smaller SMEs.

What stage is your solution in?

Operating for 1‐5 years

Innovation

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What makes your innovative solution unique?

Unique secure web-based system with open access for buyers, suppliers and financiers that:
● Combines credit collection and finance tools that enable collaboration between suppliers and financiers to optimize SME risk measurement, management and financing. For example; in Peru the credit risk of the SME finance is more than 50% less than the credit risk of loans to SME from bank (source World Bank First study: “Improving SME Access to Capital Markets April 2007”). With the solution credit risk is further decreased.
● Maximises synergy with supply chain, standardization and automation and thus allows financing SMEs at an order of magnitude lower cost than alternatives. For example, in Peru for SME companies, the cost of providing the finance is less than 1% of finance amount compared to an average of 24% in the 62 Peruvian SME finance institutions (source www.mixmarket.org).

A solution that provides monetary incentives to provide credit to the RIGHT
SME based on predictive real time risk measures

Manages the refinance of SME trade credit on a daily basis to minimize
● risk on and for the suppliers
● the impact of providing SME finance on the balance sheet

Suppliers know their clients better than banks do because they
● visit the clients more often,
● have more intense relationships and
● understand the business sector better.
The solution is the first that can use this knowledge in creating risk ratings whilst mitigating the risk of fraud by the SME.
Therefore the solution can create the most predictive risk ratings for SME.
These ratings are provided AT NO COST to the SMEs.

The first finance solution which allows to capital markets finance of receivables from Micro and SME companies in developing markets.

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

The solutions risk management works better with increasing numbers of SMEs participating in the solution. With size increasing SMEs and suppliers will trust the continuity of the finance they obtained. With the size of the amount of financing outstanding increasing, funding can be obtained from capital markets.

For the solution to work well a critical mass needs to be reached. Public intervention can act as a catalyst to reach critical mass (quickly) by providing a guarantee or funding.

The solution is very suitable for government participation because it:
● can guarantee that only SMEs are financed (no large enterprises or banks)
● is freely accessible; all SMEs and suppliers may participate
● is fair by charging each SME, supplier and financier the same for the solution
● yields a return consistent with the risks run by the government
● allows to direct support to specific sectors or regions

For example in Peru, the Peruvian state through its development organization COFIDE acts as catalyst by providing the initial financing for SME credits.

The critical mass in Peru is about $30m in SME credits, which COFIDE intends to cover. A capital markets scheme has been developed that will allow the scale of the finance to increase to whatever size needed. The capital markets scheme will also allow the Peruvian State to reduce its commitment. In addition banks will also be welcome to participate in the financing of SME portfolios on the platform.

Because of the risk management methods in the solution and because the suppliers provide substantial deposits or over-collateralization (typically 25%), the risk taken in a support program by the government can be structured to very low risk levels.

For the solution to be effective, it is important that the cost of the support program is in line with the low risk profile. Due to perceived riskiness of SMEs and the currently very low experience with SME receivable finance in emerging markets this is challenging. Development agencies often do have the skills to analyse the risks mitigating features and can therefore be instrumental in getting the solution started in a country by transferring that knowledge and initially guaranteeing the already low risks.

In conclusion, since the public will get return for risk for the support, it actually does not have a cost. The solution maximizes the leverage of scarce public resources in catalyzing substantial amount of low cost private finance for SMEs.

What barriers does your proposed solution address?

Asymmetry of information, Informality, 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 institutional capacity of financial intermediaries, High transaction costs for financial intermediaries to serve SMEs, Lack of competition / incentives for financial intermediaries to serve SMEs, Underdeveloped local capital markets (term local currency funding, exit options for SME equity).

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

● Asymmetry of information

The solution (besides using traditional sources), uniquely and for the first time uses knowledge from multiple suppliers in real time about SME clients to determine credit worthiness of SMEs. Therefore it strongly reduces the asymmetry in information between the suppliers and the SMEs.
The solution also makes available this information to the re-financier, thus removing the information asymmetry between supplier and financier.

● Informality

The solution creates credit ratings for informal SMEs based on information gathered daily by multiple suppliers to the SME about payment behavior, order size, facility status, inventory amount, owner / directors status etc. These ratings are freely available to the SMEs which they may use to obtain financing from other sources.

In this way the solution assists in removing the barrier for informal SMEs or SMEs with weak or no administration to have access to finance. This is achieved without the need for the SME to do anything.

● Lack of collateral

As suppliers visit their Micro and Small clients generally more frequent than monthly, cash can be collected immediately and inventories supplied reviewed. This reduces the need for immovable collateral.

● Lack of financial capacity

Suppliers can use the “delivery stop” to ensure the client pays. As a result clients have a stronger willingness to pay their suppliers compared to banks. Consequently SMEs with minimal financial capacity may be financed.

● Lack of SME access to skills

To participate in this scheme the SMEs just have to pay their bills on time and have a good relationship with suppliers. TREFI does not require SMEs to have well established accounting practices. TREFI allows the SMEs to focus on their core business.

● Unavailability of financial products tailored to SME needs

The product removes the usual concerns suppliers have to finance SME clients by
a) providing efficient tools to manage SME credits; and
b) removing the negative impact of increase of trade payable balances from the suppliers balance sheet.

By providing efficient credit to SME clients suppliers:
c) May increase sales to SMEs; and
d) May realise various operational efficiency improvements
Therefore suppliers will be willing to provide additional credit to SMEs covering all working capital needs.
As the solution charges each credit based on risk, it provides incentives the supplier to provide credit to the RIGHT SME clients.

● Lack of institutional capacity of financial intermediaries

The solution includes the establishment of a local agency that provides risk assessment and transaction execution, ensuring that participants have the right tools and knowledge to manage the risk.

● High transaction costs to serve SMEs

Suppliers do not incur additional operational cost if they have a larger credit outstanding to their SME clients.
In fact additional credit allows suppliers to save cost.
With additional credit the SMEs can have larger inventories, thereby reducing delivery cycles, reduce failed delivery and providing payment efficiencies.
Furthermore TREFI tools make the the suppliers risk management and collection processes more efficient.

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

Case 1:
After a long research study in Peru, has recently been first applied there. The solution is now covering 70,000 SMEs and growing.

As described under "Innovation”, in Peru the cost of providing the finance is less than 1% of finance amount compared to an average of 24% in the 62 Peruvian SME finance institutions (source www.mixmarket.org).

SMEs are much more willing to pay their suppliers than banks. The World Bank First study “Supplier credit to SME, an attractive investment opportunity” April 2007 proves with rigorous statistics that the solutions finances SME at a default rate 75% lower than of the micro and SME finance institutions in Peru, while the credits are 10 times smaller per client.

95% of the SMEs currently tracked have no credit from banks or micro finance institutions.

Overall the implied interest rates are currently about 6.5% compared to an average of 35% in micro finance institutions. With such dramatic decrease in credit cost many more SME business plans are viable increasing the SMEs ability to innovate and grow, their profitability and the economic activity in general.

Compared to the alternatives of bank loans the credits provided with the solution are cheaper, involve less risk and are easier to access by SMEs.

Case 2:
Very similar observations hold true in the Netherlands; decreasing financing costs for SMEs, convenient and sensible access to credit resulting in a structural increase in the efficiency of the financing system for SMEs.

The solution can finance against 3.25% (based on detailed analysis of capital costs, expected loss, operational costs and yield curve) whereas the post credit crisis finance scheme by the Dutch government charges 9% interest for SMEs.

Again, SME just has to ask his supplier for more credit with TREFI. Nothing else.

With TREFI credit is structurally and sustainably cheaper for creditworthy SMEs due to the lower risk and operational costs as a result of synergies with the suppliers processes, and the solutions IT infrastructure.

We have two reference points for the overall impact potential of the solution:
First, when it would reach the same amount of funding as the microfinance ($45bn), it would save SME’s more than $15bn per annum and makes far more business plans feasible.
Secondly, the worldwide SME receivable market is in the order of $12.5 trillion. This is derived assuming that the receivable market is approximately 40% of GDP and 50% is with SME (see discussions section on this entry).

Research points out that in developed markets SME credit is already an important part of the finance received by SMEs. With the current solution receivable finance can be provided with much higher efficiency also in emerging markets.
To date very limited government support has gone into stimulating supplier credit to SMEs. The current solution provides efficient means for governments to support SME credit by suppliers.

How many firms do you expect to reach?

In Peru over 250,000 micro and SMEs in 3 years.
In other countries over 1,000,000 in 3 years.
With public intervention / government participation, a substantial higher number of SMEs can be reached.

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

In Peru over $150 million in 3 years.
Including other countries over $1bn can be reached in 3 years.
With public intervention / government participation, a substantial higher amount can be reached.

What time frame will be required to reach these targets?

The targets can be achieved within 3 years with the current support available from private investors, the World Bank and FMO. However with public intervention / government participation or with private funds the solution can be scaled much faster as it is fully developed and tested in the last 10 years and has been operational in Europe for a number of years.

The public intervention / government participation should address the need for the solution to reach a critical mass by providing or catalysing reasonable priced funding to the solution.

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

No

What would prevent your solution from being a success?

● In certain jurisdictions there are legal and tax barriers for the solution.

● The lack of reasonable cost funds available to finance the SMEs through the solution before critical mass has been reached.

● Local banks opposing the implementation to avoid competition which may be substantially more efficient. Government support like in Peru resolves this issue.

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

The solution may impact SME at all levels in various industries and in various locations. By improving the access to working capital finance of the SMEs their ability to grow is improved. In this growth they will improve the lives of their employees, their clients and the people in their environment.

We highlight the credit reports that the solution creates for the SMEs involved. These credit reports are much more predictive of future default because the information used includes those gathered by multiple suppliers on a daily basis. Credit bureaus typically only gather events where the clients is in default (>90 days overdue).

The solutions ability to monitor the flow of financing to SMEs provides transparency to policy makers implementing the scheme.

The product (in particular from a risk adjusted basis) is attractive for the SMEs, suppliers, and financiers, including governments. As a result all parties will collaborate in its implementation and growth.

In Peru the solution currently tracks 70,000 SMEs in emerging markets and growing. Please join us to make the solution available to more SMEs.

Banks throughout the world are being heavily criticized for tighter lending criteria and increasing the cost of SME working capital in order to rebuild their balance sheets after the recent liquidity and credit crisis.
The availability of a major alternate source of SME financing (other than established bank finance and conventional trade finance), through this innovation, whilst using the empiric quality data of major suppliers would have the effect of both increasing underlying competition in the supply of SME finance as well as probably increasing the availability of SME finance at reasonable cost.

Since the solution ensures finance is directed to the RIGHT SME through its risk return approach, the economic growth will be stimulated additionally and innovation enhanced. Supplier credit is responsible credit.

Sustainability

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

A stable finance base to refinance SME credits provided by suppliers. The SMEs want to be sure that - when they retain their credit status - they will have continuous access to the finance.

To set up the solution in a new country initial funding is needed to:
● Make the solution comply with local law and regulation
● Make the solution capable of dealing with local trade-, invoice- and accounting practices
● Gather and analyse local market data
● Calibrate the risk models for the new countries
● Perform marketing and sales.

To reach critical mass in number and volume of SMEs, finance is needed to refinance SME credits provided by the suppliers.

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

The solution, through its systems, provides full support for managing a perpetual SME credit backed capital markets program, exceeding current state of the art. The solution provides:
● Full standardisation across suppliers and management of standard upgrades
● Highest levels of transparency and governance
● Daily investor reporting with detail level exceeding any alternative in the market
● Multiple levels of control and quality assurance
● Risk management practices of the assets exceeding market standards
● Issuance optimization and liquidity risk management allowing the effective use of the internal liquidity of the credits

With investors looking for well managed and low risk investments there should be considerable appetite and reasonable pricing.
Investors, in particular in emerging markets, will also be interested because to date they have had limited access to well managed SME backed investments.

In Peru a capital markets scheme has been defined.
Once the SME credit portfolio in Peru has grown to $30 million the capital markets scheme will allow the SME financing to grow to at least $150 million.

The time frame to graduate to capital markets depends on the time to reach critical mass, which depends on the availability of finance for the SMEs at a cost in relation to the risk. The critical mass varies substantially between countries. For instance in Euroland the critical mass is about Euro 1 billion.

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

As described in the previous question answer the solution provides attractive low risk investment opportunities with high internal liquidity and a short risk horizon and very high level of transparency.
In case of a crisis situation, like the recent credit crisis, investors are looking for such investment opportunities. Therefore it can be expected that the solution will be resilient against severe credit downturns.

The solution has a clear path and infrastructure to go to (local) capital markets. Once the capital markets are reached there will be a substantial number of investors including the public in general. As a result the solution will not be dependent on a single private funding source.

In extreme market events Governments should consider injecting funds straight into the supply chain. That will much more directly and immediately support the economy than recapitalization of banks, reducing interest rates and/or providing loan guarantee schemes. The solution offers this possibility in an effective way.

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

The project in Peru has been supported by the World Bank and financially by FMO (Development Bank of the Netherlands). The Peruvian Government is instrumental to the solution becoming a reality. They have been critical for this highly innovative and advanced solution to become reality.
In emerging markets similar partnership with the World Bank and other development agencies would be critical to the greater success and sustainability.
In developed Europe; support from European Investment Bank / European Investment Fund to reach critical mass.

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

● Often the stability and resilience of the supporting IT systems is questioned. The solution has achieved ISO 27001 for information security, availability and integrity certification 4 years ago and has operated without a single interruption for the last 5 years. The systems have been developed over the last 10 years and more than $50 billion or credits have been valued.

● Government may change law, tax-law and regulations that may make the solution too expensive or impossible to operate.

● It is sometimes argued that the suppliers do not have proper procedures to manage credits as banks are believed to have. In our work we have found that suppliers in fact have much better process management skills than banks as it is key to their survival.

The process by which suppliers provide credit to SMEs typically have all the aspects that banks take into account in credit provision, however, because of the supplier-SME relationship, is accompanied by more frequent monitoring, more predictive risk ratings and better risk management (due to amongst other the delivery stop).

The typical finance process in the suppliers which the solutions helps to implement or optimize are as follows:

1) The sales person visits the SMEs to register new orders, inspect the inventory and collect payment.
2) If the SME desires finance, the sales person may initiates the credit process which typically has the following steps:
2.1) The SME signs a contract.
2.2)The sales person collects information from the client like identification of the owner, company registration, address verification etc
2.3)The sales person fills in the credit form
2.4) The credit department checks the form, uses the solution to check the credit and the payment behavior and sets a limit in the system.
3)On each further order the client may purchase on credit, provide the client is within the limit. Inspectors review the credit limits periodically or when the solution triggers a warning.
4)Furthermore delivery personnel visit the client to deliver the order. They also inspect the status of the inventory and collect cash if due.

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

Scale up by sector and geography. We have executed studies in China, Vietnam and India.
Because scaling up is beneficial to all participants, scaling up will become easier and easier. We highlight the benefits and costs:

SMEs benefit by obtaining:
● New finance or additional finance or longer-term finance from suppliers at low or no cost. Note that the finance goes on as long as the SME continues to buy on credit.
● A credit rating that may be used to obtain additional finance through other sources at no cost and without the need to do anything
● It is one of the main advantages of the TREFI solution that the SMEs need no computers, need no accounting, do not have to be formal and need no education to receive finance under the solution. Nor do the SMEs need to go to the bank or build relationship with bank employees. At the same time the solution is able to measure risk better by using the information from the suppliers on their SME clients.

Suppliers benefit by:
● Increased sales to SME clients because SMEs will favor suppliers with better credit terms, but also because of the growth of the SME clients resulting from the credit
● Ability to reduce operational cost by optimizing delivery cycles and easing payment methods for supplied goods (see also the comments under the question “”)
● Improved risk management of clients, reducing credit losses and variation of credit loss, reducing capital costs
● Improved timeliness and willingness to pay by SME clients (although later than before)
● Without negative impact on the receivable balance
From the supplier side the solution requires integration with the systems of the supplier. This integration is comparable to typical supply chain finance (reverse factoring) however the extraction focuses on the accounts receivable instead of the accounts payable.
Because supply chain finance relies heavily on invoice approval by the large buyer, the buyer must adjust its business processes to participate. In the TREFI solution (although it allows debtors to approve invoices online) there are no such requirements, although if so desired by the large supplier it can use the risk management and collection tools in the solution to enhance the risk management and collections processes.

Governments benefit as the solution:
● Stimulates an efficient new source of working capital for SMEs increasing competition and therefore reduces price and improves overall efficiency in SME working capital provision
● Enhances activity and innovation in the SME sector of the economy
● May benefit a large number of SMEs fast and at low cost
Investors in capital markets benefit from:
● Access to perpetual highly diversified well-managed SME backed investment opportunities
● High transparency and quality daily risk reporting

Financiers benefit by:
● Having additional risk ratings to manage credit on SMEs
● Reducing risk and cost in receivable finance solutions

We note that the infrastructure to support this product is complex and sophisticated. We have all in place to manage this complexity as further elaborated in the discussions.

However from the perspective of the SMEs, suppliers and financiers a lot of work has gone into making it easy to use and simple to implement. Suppliers and financiers can also make sophisticated use of the platform by tightly integrating the solution into the sales and collection processes of the company.

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213 weeks ago Miguel Quepuy said: The TREFI solution needs the same number of parties to participate as alternative financiers like banks. However, in the TREFI model ... about this Competition Entry. - read more >
214 weeks ago Matt Guttentag said: On October 27, 2010, the judges reviewed entries for the Changemakers G-20 SME Finance Challenge competition and would like to pass on ... about this Competition Entry. - read more >
216 weeks ago TREFI ==> scalable SME finance solution without the costs and risks has been chosen as a finalist in The G-20 SME Finance Challenge.
223 weeks ago updated this Competition Entry.
223 weeks ago updated this Competition Entry.
224 weeks ago updated this Competition Entry.
224 weeks ago updated this Competition Entry.
224 weeks ago updated this Competition Entry.
224 weeks ago updated this Competition Entry.
224 weeks ago said: Hi Lucas, check out the answer to Irene Hewletts question below! about this Competition Entry. - read more >