How does your proposed innovation leverage public intervention in catalyzing private SME finance?
While the Growth Capital Fund will predominately be funded by host-county bank and NBFI partners, its impact will be significantly greater and can be brought up to scale more rapidly with public support, which could include:
- A small level of grant funding to support launch and first two years of the financing facility until it becomes fully self-funding.
- The ability to access partial guarantees and other risk mitigation measures in order to increase the willingness of investors and host-country banks and NBFIs to participate.
- Support from donor and IFI funded business development services (BDS) providers to prospective clients in: (i) developing business plans and loan request packages; and (ii) implementing the financial management system.
- Support from volunteer organizations such as the International Executive Service Corps (IESC) to link experienced business professionals and industry specialists with client companies.
- Support from trade development organizations to new domestic, cross-border and global markets for client businesses.
What barriers does your proposed solution address?
Asymmetry of information, 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, 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
It addresses all of the barriers which developing country entrepreneurs and SMEs face in accessing the financing needed to longer-term capital investment.
It addresses the barrier of collateral and insufficient capital which constrains otherwise viable investment projects from being developed. Banks are often willing to extend credit for what they consider to be a viable investment, but generally limited to not greater than 50% of the fair market value of the collateral – for example, on a $200,000 cold storage unit, a bank might lend $100,000 collateralized by the unit. However few farmers or small rural entrepreneurs have cash to fund the additional $100,000, or the sufficient additional collateral to pledge for that amount. The Growth Capital Fund will provide subordinated debt to bridge the gap between what the project developer can contribute and the bank can lend and on terms which will allow for bank repayment first.
It addresses the tenor barrier of lack of access to longer term financing. Assuming the cold storage unit will take a year to start cash flowing and has a repayment projection of six years; it requires a source of patient, longer-term financing.
It addresses the pricing barrier. Spreads on senior secured bank loans tend to be high in developing countries, and the spread on junior unsecured debt (if available) would be excessively high (beyond the capacity of most capital investments to service). The Growth Capital Fund provides for a low coupon in the early stages (when the bank debt is being serviced and repaid), and rising in line with the cash flows and capacity to service.
It addresses the capacity barrier of limited corporate finance skills. Participating banks and NBFIs would be encouraged to rotate their best and brightest officers to the Growth Capital Fund where they would receive training and hands-on support with transaction structuring.
It addresses the capacity barrier of limited formal business education and skills among entrepreneurs and small business people, but ensuring access to business skills training, BDS providers, and mentoring by senior experienced businesspeople and industry specialists.
It addresses the information asymmetry and financial literacy barrier faced in developing country businesses (and in privately owned and operated firms in general) though introducing a standard template for financial and managerial reporting which has been specifically developed for SMEs. This template provides a financial management tool (actually a rudimentary MIS) as well as a monthly, quarterly and annual financial reporting system.