sme finance @ pacific microfinance week 2013

8/14/2019 SME Finance @ Pacific Microfinance Week 2013

1/40


2/40

Agenda

1. What is SME Finance?

2. How should we do it?

3. Excursion: Collateral

4. SE Loan Productsa. Marketingb. Applicant Screening

c. Credit Appraisal


3/40

What is SME finance?

How should we do it?


4/40

Source: IPC GmbH

There is no typical SME...


5/40

The SME Finance 'Gap'

Corporates

LargeEnterprises

MediumEnterprises

Small Enterprises

Micro-EnterprisesMFIs

Banks

SME

Finance

Gap


6/40

Three approaches to fill the SME Finance Gap

MFI

Upscaling

Bank

Downscaling

Investors

Greenfielding


7/40

MFIs usually work their way up the ladder,

starting with Small Enterprise (SE) finance

Family-owned andmanaged enterprises

More or less formal, but poor financial records

Private and business affairs not clearly separated

Labor-intensive, low productivity

Lack management and financial skills

Many non-financial challenges: power supply, taxation,

corruption, red tape, transport, staff skills, succession...

One third of start-ups fail within three years!


8/40

Good reasons for MFIs to get into SE finance

Grow with your clients (client graduation)

Virgin market

Larger loans, reasonable profit margins

Diversification of the loan portfolio

Good for reputation

Availability of external support (cheapfunding, credit guarantee scheme, TA, etc.)


9/40

However, there are also drawbacks...

Up-front expenses market research, product development, MIS, HRD, etc.

Higher operational expenses per client

more time used for loan appraisal and client monitoring

Liquidity constraints

longer loan durations, larger loan amounts, grace periods

Higher risks

limited collateral/enforcement options,

lack of audited financial records,

concentration risk,

loan loss provisions,

lack of credit bureau information


10/40

Various approaches in SE lending

Group approach (suits group-based MFIs)

Individual approach (suits clients better)

Relationship lending (costly but effective)

Credit scoring (for advanced lenders)

Collateral based lending (sometimes challenging

in developing countries)


11/40

Excursion: collateral


12/40

Using Movable Collateral

Works in all industries and with many types ofmovable property:

Agriculture: livestock/cropsas collateral for seedsor a tractor loan

Manufacturing: tools, existing equipmentascollateral for new equipment purchases

Grocery store: the inventoryon the shelves ascollateral for a loan

Wholesalers: accounts receivable as collateral for

a loan


13/40

ADBs Support to lenders

Provide an easier way to use movable property

as collateral for loans

How the reform process works?

Legislative changes that provide for an efficient

framework

Implementation of on-line collateral registry to assist

lenders in evaluating borrowers

100% predictable results in the case of default


14/40

Sample Client Registry Page: Tonga


15/40

How the reform reallyworks

Business case example: restaurant expansion Owner needs a loan, visits lender

Lender willing give $$$, but demands collateral

Restaurant

No land ownership

Does own kitchen equipment, chairs, etc.

Restaurant owner can pledge movable assets as collateral

and keep those assets working while paying off loan

Lender registers security interest (collateral) online

If owner fails to pay loan, lender can seize the collateral and

sell it to pay off the loan


16/40

SE loan products


17/40

Typical products in SME Banking

PURPOSE PRODUCT

Cashflow Management Working Capital Loan, Money Transfer Services,

Check Account, Overdraft/ Credit Line, Credit

card, Trade Finance, Factoring, Savings Account

Business Protection &Expansion Savings Account, Insurances, Guarantees/Letter of Credit, Term Loans, Leasing, Term

Deposits

Profit Enhancement Investment Advice and Investment Products

Private Life Short and long term Deposit Accounts,

Insurance, Credit Card, Housing Loan


18/40

Example: Working Capital Loan

for Trade and Service Businesses


19/40

Product Flyer

We help you to manage your business cashflow

Loan repayment schedule that fits your cashflow

Multi-purpose: buy stock, buy or repair equipment,vehicle or building

We accept movable assets as collateral

Bronze, Silver and Gold Membership Card Max. loan sizes and duration: 5,000 USD / 1 Year;

10,000 USD / 2 years; 30,000 USD / 3 years

Interest rate: 15-20% p.a. (on actual loan balance)

Loan decision within 5 working days


20/40

Direct Product Marketing

ExistingClients

Recommended

Clients

Visit Potential

New Clients

Mobile MarketingUnit

Marketing Events(fairs, exhibitions)

Product

Presentations(e.g. for business

associations)

Target desired market segment


21/40

Fictional Case:

Applicant runs a FastFood Restaurant

(VFC)

Loan amountrequest: 5000 USD

Loan purpose:stock purchase


22/40

Loan Application

Eligibility Criteria

(esp. financial

track record and

business

experience)

Loan request

reasonable?

(purpose,

amount,

duration, owncontribution)

Income sources

for loan

repayment

(business and

household)

Acid Test: 50% of

average monthly

net cashflow to

cover loan

repayment

Screen out hopeless cases


23/40

Criteria SCORE CARD RESULT

Does the

applicant have a

good financial

track record?

Yes (regular savings and loans) = 10

Yes (regular savings only) = 7

Irregular savings but no loan repayment problems = 5

Loan repayment problems in the past = 0

10

Does the

applicant have

good business

experience?

More than 5 years without business problems = 10

More than 5 years but minor business problems = 8

3-5 years without problems = 5

Less than 3 years = 0

10

Is the loan

request

reasonable?

Yes = 10

Minor inconsistencies = 8

Several inconsistencies = 5

No own contribution to investment = 0

8

Household

income sources

More than 3 sources = 10

3 sources = 8

2 sources = 5

Only from business = 0

5

Acid test Positive = 10

Negative = 010


24/40

Application Scoring Results for VFC

43

POINTS

RESULT RESPONSE

50-40 POINTS

Continue with loan

application processing

39 - 20 POINTS

Discuss with Senior LO

whether to continue

BELOW 20 POINTS

Inform client that

he/she is not eligible

for a loan at this stage.


25/40

The 5 C's of the Credit Appraisal

Character - stable and honest

Capacity to repay the loan

Capital sufficient to carry debt

Collateral suitable as security

Conditions favorable for the business


26/40

The Credit Appraisal consists of...

Site visits to collect and

cross-check information

Character Assessment

Business Assessment

Financial Assessment


27/40

Character Assessment

Reputation

Family problems

Honesty

Loan defaults

Savings pattern

Conclusion:

Is the client likely to default on the loan

due to character weaknesses or due toproblems in his/her private life


28/40

Business Assessment

Business infrastructure

Technologies used and Skills of workers

Operational Management

Financial Management

Dependency on suppliers / buyers

Competition

Market outlook (demand, prices)

Customer feedback


29/40

Financial Assessment

BalanceSheetIncomeStatement CashflowStatement


30/40

Balance Sheet of VFC

ASSETS USD LIABILITIES+EQUITY USD

Current Assets:Cash on hand

Bank account

Savings account

Receivables

Stock

100

250

5,500

0

1,000

Current Liabilities:Payables (suppliers)

Loans

Others

6,200

0

0

Fixed Assets:Home

Business building

Furniture

Kitchen

Mini-Van

45,000

100,000

10,000

20,000

5,000

Long-term Liabilities:Loans

Others 0

0

Equity 180,650

TOTAL 186,850 TOTAL 186,850


31/40

Balance Sheet Analysis

Collateral value

= 35,000 USD in movable assets

Debt-to-Equity Ratio

= 3% (before loan), 6% (after loan) and 17%(after loan and without immovable fixed assets)

>> capital base of the business is strong

Current assets/ Current liabilities

= 110% >> Liqudity situation of the business isquite weak; standing with suppliers should be

checked


32/40

Income Statement

Year 2012 USD

Sales 150,000

Cost of Goods Sold (COGS) (50,000)

Gross Profit 100,000

Operating expense (staff, utilities...) (60,000)

EBITDA 40,000

Interest 0

Depreciation / Amortiziation (15,000)

Taxes (5,000)

NET INCOME 20,000


33/40

Income Statement Analysis

Sales growth >> market position

Sales per Staff >> productivity

Profit margin = (Net income before taxes) / Sales = 17%

compare this ratio to other fast food restaurants to

assess profitability

Sensitivity to dropping sales and price changes simulate different scenarios, e.g., 10% sales decrease

results in Net Income before tax of 10,000 USD(can the family live on that?)


34/40

Cash Flow Statement (projection based on past performance)

Jan Feb Mar Apr

Cash InflowBusiness

12,000 12,500 13,000 12,000

Cash Outflow

Business

-16,000 -10,000 -13,000 -10,000

Cash Inflow

Household

2,000 2,000 2,000 2,000

Cash Outflow

Household

-1,000 -1000 -1000 -1000

Cash Inflow

Financing

10,000

(loan + own c.)

0 0 0

Cash Outflow

Financing

-6,200

(supplier)

-1,900

(loan)

-1,900

(loan)

-1,900

(loan)NET CF 800 1,600 -900 1,100

Accumulated 800 2,400 1,500 2,600


35/40

Cashflow Statement Analysis

Adjustment of loan instalments to theactual repayment capacity in eachmonth

Savings potential (acccumulated netcash flow) can be used as risk buffer forunforeseen events

Sensitivity to dropping sales and pricechanges for each month (scenariosimulation)


36/40

Cross-Checks (examples)

BALANCE SHEET INCOME STATEMENT CASHFLOWSTATEMENT

Net CashflowAssets: Cash & Bank

Accounts

Net IncomeAssets; Equity

Sales; PurchasesReceivables;

PayablesCash In; Cash Out

SalesInventory Turnover


37/40

How to avoid typical pitfalls in Credit Analysis

Clients can paint a rosy picture of their businesses.

If business ratios are much better than industryaverages, re-checkthe data.

Look at long-termtrends in the business rather thanshort term results (e.g., growth of assets and equity)

Conduct sensitivity analysis to assess the impact of

changesin prices and sales

Cashflowoften paints a more realistic picture thanthe Income Statement

Don't forget to include irregularcash flows(maintenance, replacements, private expenses,additional incomes)

G d l ffi l ff fi i l d i


38/40

Good loan officers also offer financial advice to

their clients...

Separate household

and business

finances

Pay a salary to

yourself and to all

household membersworking in the

business

Save up for

emergencies and

lump sum

payments, such as

taxes and major

purchases

Maintain a cash-

book and follow

up on accounts

payable and

receivable


39/40

THANK

Thank you for your participation...


40/40

Thanksfor your

participation....

Questions?

More information contact :

Sabine Spohn, Pacific Liaison and Coordination Office www.adb.org/plco [email protected]

sme finance @ pacific microfinance week 2013

Documents