Climate Lending to Franchised SMEs - a personal savings scheme that catalyzes green business
- Climate change
- Energy
- Energy conservation
- Financial services and markets
- Green business
- Renewable energy
Example: Walk us through a specific example(s) of how this solution makes a difference; include its primary activities.
Carbon Impact Limited (CarboCo)
+261 3302 21405
Rue de l'Institut, Ebene
, PU
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Developing nations
Africa, Latin America and the Caribbean, South Asia.
Less than $1 Million, $1-5 Million.
750,000
5-24, 25-49.
20
The investment needs and administrative complexity of projects that generate CER/VER carbon credits is high even for simple initiatives. This prevents SMEs from starting profitable, climate-saving ventures. CarboCo developed a proprietary Franchise that centrally manages carbon transactions on behalf of SME Franchisees that implement standardized CO2-saving businesses. The investment / working capital requirement for a typical SME franchise is $750,000. This amount, multiplied for each participating SME, is crowd-sourced through the Climate Lending website - and returned with attractive interest once carbon credits are paid out. Part-franchises are allowed, and multiple projects will run in parallel as finance/business volume grows.
Operating for less than a year
This venture leverages public funding and the reputation of supporting partner organizations to fund the scheme’s startup costs whilst ensuring the credibility and wide media publicity that are critical to establish consumer confidence and awareness, and draw visitors to the lending website. The public role includes financing a revolving insurance fund to cover the risk to consumers who lend to SMEs that might default on implementing the business according to Franchise guidelines, which could lead to loss of carbon credits and thus compromise loan repayment.
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 collateral and lack of financial capacity: SMEs in developing nations are often under-capitalized or lack assets to ensure the collateral necessary for obtaining (working capital) loans. The standardized franchise reduces SME business implementation risk, and this allows the Carbon Financier to guarantee future carbon revenue payment. This greatly reduces the need for SME collateral.
Lack of SME access to skills / knowledge / markets: by providing a standard franchised business model, SMEs are provided with proven systems, training, coaching, monitoring and support, and thus enabled to professionally implement carbon-credit generating businesses for which they currently lack the skills, understanding or capabilities.
The unavailability of financial products tailored to SME needs is addressed by providing working capital loans on favorable terms, since they are raised from hard currency, low-interest Western consumer markets that require relatively low interest payments and protected by a publicly funded insurance fund.
Recent years have seen a proliferation of successful online Peer-to-Peer lending schemes, such as Kiva, who have demonstrated the viability of loaning money to people or micro-enterprises in developing countries – but do not generally return money with interest. By modifying their approach to extend loans to SMEs that run climate-saving businesses; and by offering unparalleled security, reputation, social/environmental impact, as well as attractive interest rates, we offer an attractive proposition, which will catalyze carbon-saving enterprise in developing countries.
CarboCo and its partners have already developed and implemented a first SME franchised improved cookstove project in Madagascar, as well as a solar lighting business, thus providing proof-of-concept at the SME and carbon level. By focusing on CER and VER markets, we set the bar high in terms of professionalism and rigor.
This initiative aims to reach at least 50 SMEs over the next 5 years – with multiple franchised projects running at a time as the business scales.
Through Climate Lending we aim to raise multiples of $750,000 (with each sum representing an average full SME carbon business). Our projections forecast raising $40-50m in loan capital during the first 5 years.
Our business plan focuses at the next 5 years.
No
* Failure to have a carbon project registered by UN Executive Board. This would affect one, but not all Franchise activities.
* Inability to generate sufficient lender trust despite ‘big name’ underwriters and the publicly funded insurance fund.
* Inability to grow to scale rapidly, for instance by failing to generate sufficient media awareness and ‘hype’ to attract online lenders in sufficient volume.
* Inability to partner with big name organizations, thus reducing ‘clout’ and consumer confidence.
* Carbon market risk, such as a dramatic reduction in the price of CER/VER credits – although this is mitigated by emissions reduction purchase agreements that include a locked-in minimum price.
* Bankruptcy by SMEs that have accepted and spent a loan. This is mitigated through the Franchise Agreement, in which ownership of goods purchased with the loan remains with CarboCo until outstanding loans and fees have been fully reimbursed. This allows CarboCo to take over the activities of a carbon project if the implementing business fails.
* Poor quality business implementation by SMEs that have accepted and spent a loan. An example is lack of monitoring and reporting, which could threaten the issuing of carbon credits. This is mitigated by: 1) careful SME monitoring by CarboCo; 2) financial incentives whereby SMEs are paid carbon revenues last, after outstanding loans & fees have been repaid.
* A severe price drop in the CER/VER carbon markets, resulting in financial non-viability of the SME businesses. This is mitigated through purchase agreements with our Carbon broker, and which includes a minimum price guarantee.
1) Startup funding is required to finalise developing the Franchise, the Climate Lending website, as well as marketing expense for website promotion and acquisition of participating SMEs, estimated at $500,000 in the form of a grant or soft-loan.
2) An independently managed loan insurance fund will be set up, its size anticipated at 5% of outstanding loan volume. Based on first-year's projections, an initial amount of $750,000 is required. The insurance fund will subsequently self-finance through the contribution of a percentage of carbon revenues realized.
3) Loans to SMEs are raised from individuals or organizations through the website, with a maximum of $750,000 per SME franchise, and an expected total of 50 franchises after 5 years, thus generating an expected $40-50 million towards SME finance over this period.
Public finance is needed only once: on startup to finance website & franchise development costs; and for the creation of the initial loan insurance fund. Once set up, this then catalyzes the raising of additional funds through the peer-to-SME lending website from private individuals and organizations that wish to lend to carbon-saving businesses.
The SMEs pay back their loans once carbon credits have been generated, issued and monetized. Depending on which type or mix of carbon-saving franchise activities are implemented, which determines how long it takes before carbon revenues become available, the time frame to financial independence is between 2 and 4 years.
Without an initial one-time investment, this business cannot be started – however the absence of such financing in subsequent years is foreseen as costs are covered by earned revenues. For instance, ongoing Master Franchise business expansion, website maintenance, fees & overhead costs as well as margins are financed from franchise fees paid by the SME franchisees, and through a commission applied to carbon revenues.
A reduction in loan volumes generated through the website is managed by carefully limiting the loans subsequently extended to SMEs.
This business is not viable if the price of CER/VER carbon falls below $10 per ton of CO2.
Establishing strong partnerships with large, highly reputable and well known organizations is critical to success of this venture. Only through highly visible and credible partnerships will this initiative become newsworthy to global news media. This is key to driving large numbers of visitors to the Climate Lending website, without which it will be very difficult to attain serious loan volumes. Equally important, partnerships with such organizations will instill trust that the scheme is credible – thus providing essential confidence to lenders that their money is secure and will be returned with interest.
Ashoka and the Rockefeller Foundation are ideal partners in this regards – and combined the participation of the G-20, strong global media exposure is virtually guaranteed if this proposal wins. Meanwhile, the development banks and interested bilateral donors that support this challenge, might be interested in financing startup costs or creating the loan insurance fund, or even subsequently invest by making first loans through the website.
Doing business in developing countries entails political, economic and climatic risk, which differs per type of franchise activity (e.g. a biomass plantation might be susceptible to adverse weather conditions, whilst a fuel-efficient cookstove business is more vulnerable for political-economic insecurity). Such risk is mitigated by diversifying by business type as well as by country.
This business intends to scale rapidly, by aggressively growing loan volumes raised for SMEs through the website. Keeping step with the funds thus generated, geographical replication will take place by competitively identifying SMEs in key African and Asian territories. Country selection takes place based on several criteria, including the potential and feasibility of selected carbon-generating business project, bureaucratic and fiscal considerations, etc. Initially, the business will offer only two carbon franchises: fuel efficient cookstoves and solar lighting. Based on milestones that include minimum loan volume and numbers of participating SME, country coverage and organisational management capacity, additional offerings will become available (to include for instance biomass plantations for the production of charcoal or electricity co-generation).
An important consideration for scaling up is building partnerships with financial institutions that bring in key expertise for handling growing loan volumes and managing SME investments.