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04/21/23 1
Innovations for SME finance to counter
the economic crisisThierry Sanders
Director & Founder BiD NetworkAPEC SME SymposiumTaipei, June 8-9 2009
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a “declaration of ignorance”1997
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Developing country SMEs seeking between US $10,000 – US $1 million
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PNGLightingUS$ 200,000
PhilippinesLobstersUS$ 86,000
VietnamFaceMasksUS$ 15,000
PeruPostcardsUS$ 60,000
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BiD Network: Supports SME centers with Sourcing BPs, BP coaching, investors & internet
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www.bidnetwork.org
[2] Matchmaking
[1] Sourcing,
assessment& coaching
Entre-preneurs
[3]Investment
Services
FinancedSMEs
Self-startedSMEs
Investors, brokers &
banks
Experts &Coaches
7000
500 100
30025,000 membersin 12 countries
APEC members: Philippines, Mexico, Peru+ interest from Indonesia, Chile, PNG, Thailand, Vietnam
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BiD Network helped start 300+ SMEs in 4 years
• Average $150,000 financing need• +/-200 of 300 (66%) start without formal finance• 10 direct jobs created within 2 years / SME• 30 jobs created within 3 years / SME• 4 jobs on average, per $60,000 invested / SME• Cost per job: $1500 (BiD budget) or $15,000 invested• Estimated 50% failure rate• Aim for a 15% IRR
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Outline
1. Why are SMEs important?
2. Consequences of the Economic Crisis for SMEs
3. Innovations in SME Finance to counteract the crisis
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“The Missing Middle” lack of finance is the biggest constraint to SME growth
> 1000 employees
251 - 1000 employees
10 – 250 employees
1 – 9 employees
Size & No. of companies(indicative)
1 %of all companies
4 %
50 %
45 %
Contribution of businessto GDP
(IFC average)
+/- 30%
+/- 20%
+/- 30%
+/- 20%
Finance Availability( indicative)
> $2 million
$ 500,000 -$ 1 million
$5,000 –$ 500,000
$ 0 –$ 5,000
International commercial finance
Local banks & subsidizedfinance
Local banks, ‘ hawkers’ & personal loans
Microfinance,‘ hawkers’ & personal loans
Finance Availability(Indicative )
> $2 million
$ 500,000 -$ 1 million
$5,000 –$ 500,000
$ 0 –$ 5,000
International commercial finance
Local banks & subsidizedfinance
Local banks, ‘ Loan sharks’ &personal loans
Microfinance ,‘ Loan sharks’ &personal loans
Missing
Middle
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SMEs are job creators,exactly what we need in an economic crisis
• 95% of the poor earn their income from/via SMEs
• 40% of formal GDP and 50% of formal employment
• 70%-80% of formal + informal employment
Sources:IFC msme database 2005.OECD Private sector development reports 2006
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Consequences of the Crisis for SMEs
1) SMEs facing big problems2) SMEs doing relatively well
... and the big picture
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SMEs in the crunch
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SMELow cash reservesCapital intensiveLeased assets
Paying off loans via foreign sources (e.g. remittances)
Short term loans(1-2 years)
Variable interest rates
i.e. high debt-equity ratio
Selling products for the middle classes
Selling commodities
Dependent on export sales
i.e. The bigger formal-sector SMEs. Capital intensive, middle-class & export markets. The ‘financiable’ SMEs.
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SMEs doing relatively well
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SMELabour intensiveLow Debt/Equity ratioReserves
Restructuring from debt to equity
Long term loans (3-10 years)
Fixed interest rates
Equity finance or suboordinated loans
Selling products for lower classes
Selling local markets
Buyer of commodities
Seasonal labour
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SectorsHard hit- Mining- Energy & Utilities- Chemicals- Trade & Transport- Food processors (export)- Textiles & Manufacturing- Construction- Finance- Tourism
Doing OK- Agriculture- Fisheries- Affordable consumer goods- Repairs- Supermarkets
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Growth opportunities in 2009 are with SMEs & growth countries (IMF April 2009 data)
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Nepal 3,600Côte d'Ivoire 3,704Benin 3,843Mali 3,882Papua New Guinea 3,900Sudan 3,958Gambia, the 3,984Zambia 4,038Mozambique 4,300Lao People's Democratic Republic4,375Morocco 4,400Sierra Leone 4,489Ghana 4,501India 4,523Liberia 4,868Tanzania 4,966Bangladesh 5,000Djibouti 5,105Rwanda 5,603Bhutan 5,661Uganda 6,200China 6,520Ethiopia 6,524Iraq 6,884Malawi 6,895Uzbekistan 6,978Timor-Leste, Dem. Rep. of7,173Yemen, Republic of 7,668Afghanistan, Rep. of.8,960Congo, Republic of 9,546
Bolivia 2,200Mauritania 2,345Central African Republic2,400Cameroon 2,444Cape Verde 2,486Indonesia 2,495Pakistan 2,500Azerbaijan 2,534Guinea 2,552Guyana 2,604Mongolia 2,652Congo, Democratic Republic of2,696Suriname 2,800Chad 2,830Nigeria 2,859Vanuatu 3,000Jordan 3,000Lebanon 3,000Kenya 3,013Niger 3,022Syrian Arab Republic3,027Panama 3,049Senegal 3,124Iran, Islamic Republic of3,214Vietnam 3,266Tunisia 3,300Peru 3,487Burundi 3,530Burkina Faso 3,535Egypt 3,560
Argentina -1,515Brazil -1,301Namibia -0.735Cambodia -0.513South Africa -0.318Madagascar -0.178Colombia 0.000El Salvador 0.000Chile 0.114Paraguay 0.488Costa Rica 0.500Swaziland 0.500Dominican Republic0.500Nicaragua 0.500Lesotho 0.627Gabon 0.727Kyrgyz Republic 0.944Georgia 1,000Belize 1,000Guatemala 1,000Haiti 1,000Eritrea 1,138Uruguay 1,300Honduras 1,500Togo 1,691Guinea-Bissau 1,904Tajikistan 2,000Mauritius 2,065Algeria 2,113Sri Lanka 2,200
Botswana -10,426Ukraine -8,010Turkey -5,100Armenia -5,000Belarus -4,327Mexico -3,671Angola -3,580Croatia -3,529Malaysia -3,499Moldova -3,400Bosnia and Herzegovina-2,988Thailand -2,969Jamaica -2,597Venezuela -2,200Bulgaria -2,000Serbia -2,000Kazakhstan -2,000Ecuador -2,000
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Invest in the middle classes to safeguard SMEs
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The Middle classes are:
- Consumers
- SME entrepreneurs
- SME investors
- Well educated
The Economist, February 12th 2009
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ASIA is by far the biggest market among the poor.
Income per person:< $ 3000 / year< $ 3,35 / day Brazil<$ 1,89 / day Ghana<$ 1,58 / day India
Source: “Next 4 Billion” WRI 2007
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8 innovations for SME finance in times of crisis
Banks Investors Governments
Debt-Equity Swaps Debt-Equity Swaps Help liquidationsRoyalty FinanceMatching Fund Matching Fund
Sourcing SMEs Business Angels SME centers online
Investor ServicesBiD-X
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3/4Fi
nanc
eSy
stem
s
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#1: Help liquidations
Bancruptcy = breath of fresh air for the entrepreneur?
Cancel payments to creditors.Cancel bank loans.But, lose collateral, debtors & reputation.
And, restart with a healthy balance sheet.
Law & regulations needs to support this.
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#2: Source SMEs from banks
Banks are writing off bad SME loans.They have shortlists of poor-performing SME loans.
Risky clients are interesting clients for investors, especially if the bank is rid of them for favourable terms & for SME is debt is replaced with equity.
Investment scouts should talk to banks.
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BiD Networkservice
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#3: Get SME Centers online
• Get your SMEs to register themselves & their BPs• Organise BP competitions• Get coaches involved• Seek out the best BPs• Organise investor meetings• A good online platform can increase visibility
domestically & internationally• Organise an annual event for investors & SMEs
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BiD Networkservice
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#4: Business Angel Networks
• Unlisted investments have investor interest• These individuals are poorly organised• Find them, organise peer-networking events• Get them to learn from eachother• Source & discuss deals together• Co-invest, syndicatewww.eban.orgwww.angelcapitalassociation.org
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BiD NetworkLatin America
(Mexico)
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#5: Debt-Equity Swaps (revisited)
• Short term loans Long term loans• Variable interest Fixed interest
• Loans Suboordinated loans• Loans Royalty Finance• Loans (bank) Swap to Equity (investor)
i.e. investor pays off the loan (principal + interest) to bank for an equivalent value in shares in the company.
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#6: Royalty based finance
LoanLow fixed interest rate (~ 5%)Fee over the sales (~ 1%-5%)Penalty clause for early repaymentExit fee negotiable
i.e. Pay more when the sales are good.
Business Partners International – South Africa
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BiD Networkservice
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#7: Matching funds
50% automatic matching by government of investment transactions.
• Government allocates money to a fund (€50 million).• The fund manager (TechnoPartner, Netherlands)
audits & approves participant investors & VC funds.• Investment transactions by investors are
automatically doubled by Fund, on the same terms as investor.
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#8: BiDx - online auction for SME financing (launch 2010)
• Established SMEs (€20,000 - € 2 million)• Investors (€ 5000 +)
We seek 1 more partner for US$ 750,000
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Providers SME BiDX auction
Auction new loans
Auction old loans
Broker
Investors
‘Lender’
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BiD Network www.bidnetwork.org
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National Partner countries Peru, Mexico, Bolivia, Ecuador, Colombia, Argentina
Kenya, Tanzania, Uganda, Rwanda, Jordan and
Philippines
Web community members* 25,000
Entrepreneurs* 7,000
Coaches 400
Investors 80
SMEs started* 300
Finance Leveraged* Eur 5 mln
Direct jobs created* 2500
First year of operations 2005 * Since January 2005
Legal Form A not-for-profit “stichting” (Foundation) in Amsterdam
