Access to credit for agricultural SMEs Webinar September 26th, 2013

1. Access to credit for agricultural SMEsWebinarSeptember 26th, 2013 In coordination with:

2. Financial Literacy Toolbox for Sustainable Agricultural Organisations in Sub-Saharan Africa Produced for Finance Alliance for Sustainable Trade By MicroSave With support from

3. About myself… • Alejandro Morales • More than 10 years of experience as financing specialist. • PhD in Planning & Civil Engineer from the National University of Mexico. • Project Manager of the 10th FAST Financial Fair held in Kenya on September 2013.

4. This webinar will help answer: • What are the different sources of money to fund operations of my organisation? • What are the options for debt financing? What are the advantages, disadvantages, and process for debt financing? • How does business planning is related to long term capital structure strategy?

5. Free Cash Flow • Free Cash Flow is the cash you generate after you have paid for operations, capital investments, and financing obligations. • Both debt and equity investors assess the organisation’s “credit readiness” / “investment readiness” through the analysis of Free Cash Flow. • As financing source itself, it is a patient capital with low cost, no oversight, no current payment and no collateral.

6. Equity Financing • When the legal structure of the organisation allows so, they can go for equity financing. • Equity financing therefore implies raising funds by selling part of the ownership of a company to investors who are most commonly referred to as shareholders. • Equity holders seek to increase the value of their initial investment through higher long-term returns. • Different from debt financing, equity financing does not have to be repaid. However, investors are typically more involved in the governance of the organization.

7. Debt Financing • Debt financing (loans) bears a financial cost in the form of interest charges and fees under an agreed repayment schedule in the future. Terms are negotiable. • The interest is the “price” of the risk that the borrower may not repay the loan. Usually this risk is mitigated by a preferential call on the assets of the organization in case of default (collateral). • Lenders almost never take on a governance role, but do seek periodic updates and require the organization to maintain certain performance measures and/or may also seek to limit the scope of the operations.

8. Generic debt instruments • Overdraft Facility helps to fund cash flow shortages with a pre-fixed limit. • Revolving cash credit allows the organization to draw down and payback multiple times within the term. • Working Capital Instruments are used for investing in revenue generating assets. • Bridge loan is used for a medium-term till one acquires a relatively stable term financing. • Term Loan has a specified repayment schedule. It is given for a specific purpose.

9. Steps in planning debt financing Before approaching a lender, the organisation must forecast its financing needs, allowing it to determine:  • Amount of the debt financing that is needed; • Term for which debt financing will be needed; • Timing by which it will be needed; • Impact of the debt financing on its cash flows.

10. Steps in planning debt financing In selecting the appropriate facility to suit the organization's needs, it needs to assess the following:  • The term of the selected financing facility must match the term of the organization's financing need, otherwise there could be a risk of financial shortfall. • The collateral has an important incidence on the type, interest rate and term of financing facilities that the organization may have access to. • There are products designed for almost each kind of need.

11. Steps in planning debt financing The credit assessment process (also called “due diligence”) is intended to identify the organisation’s capacity to eventually fulfil the obligations related to the financing. Usually it covers the following areas: • Historical information, mainly of annual financial statements, from the last 3 years, including explanation of any unusual items. Historic debt servicing track records are very useful. • Financial projections presenting the financial requirements and how debts can be serviced. This should highlight the economic benefits of the financing for the business. • Information about the collateral (sales contracts, fixed assets, inventory) • Business plan, which would support the financial projections and future viability of the organisation. • Overall business environment, including in relation to the competition, the industry, the country and region, market prices, etc. • Meeting with senior management, and occasionally also with the staff, in order to assess the organisation’s business capability.

12. “Banks are great at giving you umbrellas when it’s sunny outside and then taking them away when it starts to rain.” Author unknown

13. Access to credit for agricultural SMEs (Part 1)Thank you! September 26th, 2013 In coordination with:

14. The 5 C’s framework • Capacity—ability to repay liabilities out of income. • Capital—financial resources available to meet commitments should income not materialize. • Conditions—how the current environment may impact upon the enterprise, whether via competition, economic, industry, or other factors. • Character—the quality of management: Who are they? What experience do they have? Are they well suited to lead the company? • Collateral—security provided, including the pledge of assets, guarantees from third parties, or other risk mitigation.

15. Tipspreparing your loan application • Assess the business capabilities, identify gaps and prioritize corrective actions. • Scan the competitors. What is the most productive competitor able to do? What about the least? • Use assumptions consistent with the competitive, sales, and marketing strategies • Be realistic, even conservative. Growth rates general should diminish with time. Include breakeven & sensitivity analysis.

16. When to approach a lender? The organization should approach lender when its business satisfies the following important characteristics: • Good cash flow • Ability to service debt • Specific purpose • Experience and knowledge of the business • Good reputation and standing • Sufficient collateral

17. Capitalize meeting with lenders • A clear and open communication usually allows the organization to obtain suitable advice. • Taking your time to explain your business and its financial performance, will allow the lender to offer the financing products that better fit your needs. • A good relationship with the lender, may become a long-term source of remarkable feedback about the organization's current and planned businesses.

18. Access to credit for agricultural SMEsThank you!September 26th, 2013 In coordination with: