Improving BSO Services and SME Performance Through Cleaner Production

1. Improving BSO Services and SME Performance Through Cleaner Production [SPEAKERS NAMES] [DATE]

2. Module 8: Financing Cleaner Production 8.1: Understanding loan approval at commercial banks

3. Possible funding channels for CP • Environmental revolving loan funds • Development banks & credit schemes • Ex/Im finance guarantee schemes Shareholders(equity offering) Government-subsidizedcredit Public/ODA sources CommercialBanks InternationalDevelopmentAssistance Leasingcompanies; equipmentvendors Company Internal sources Commercialsources Partners/owners Customerfirms Cashreserves Credit cooperatives/unions Improving MSME Performance through Cleaner Production. Module 8: Financing CP. Visit www.encapafrica.org.

4. Our focus: commercial banks • Difficulties in accessing commercial credit are one of the largest challenges involved in implementing CP capital investments, particularly for SMEs. • Many development organizations engaging in SME support projects and SMEs themselves have little experience in dealing with commercial banks ! ? ! Improving MSME Performance through Cleaner Production. Module 8: Financing CP. Visit www.encapafrica.org.

5. Background: Commercial Banks Acquire funds by receiving money from savers: savings accounts, deposit accounts, etc. Provide funds to borrowers through term loans, lines of credit, bonds, etc The interest payments on loans are used to pay interest to depositors & are a primary source of profit for the bank To be profitable/sound, commercial banks focus on: maximising their returns & minimising the risks they accept Commercial Banks: Improving MSME Performance through Cleaner Production. Module 8: Financing CP. Visit www.encapafrica.org.

6. Therefore: ! their principal expertise is evaluating borrower credit-worthiness. . . not the performance of CP investments! Improving MSME Performance through Cleaner Production. Module 8: Financing CP. Visit www.encapafrica.org.

7. Commercial bank financing instruments For SMEs, commercial banks offer two main types of financing instruments: Term Loans 1 • Issued for a specific project/purpose • Specific amount and term (months or years) • Interest rate will reflect risk & may be fixed over time or variable • Can usually be used for any purpose • Approved up to a credit limit. The customer can use any amount up to the limit. • Higher interest rates than term loans. Interest is charged only on credit actually used. Lines of Credit 2 Improving MSME Performance through Cleaner Production. Module 8: Financing CP. Visit www.encapafrica.org.

8. Commercial bank loan procedures 1 Application applicant prepares proposal and submits to bank Commercial banks’ loan procedures have 4 basic stages 2 Review Bank evaluates application and sets or negotiates conditions failure Award 3 We will examineat each stage in more detail Paying back, with interest 4 Improving MSME Performance through Cleaner Production. Module 8: Financing CP. Visit www.encapafrica.org.

9. Commercial bank loan proceduresApplication 1 • Before applying to any particular bank, research and review potential funding sources • Have initial informal discussions with bank loan officer • Fill out bank’s loan application form; obtain all necessary data • Submit the loan application and supporting documents to bank. Application ! Establishing a personal relationship with the bank/loan officer is very important! Improving MSME Performance through Cleaner Production. Module 8: Financing CP. Visit www.encapafrica.org.

10. Commercial bank loan proceduresApplication review and loan award More information requested 2 Review Application Review Negotiateterms* Award 3 Agreement on terms? NO YES Review and award involve the following steps: Commitment letter & term sheet Funds received Loan agreementsigned *Terms include, e.g. interest rate,repayment period & collateral Improving MSME Performance through Cleaner Production. Module 8: Financing CP. Visit www.encapafrica.org.

11. Commercial bank loan proceduresWhat is the basis of the bank’s review? • economic viability of the specific project • the financial/economic status of the enterprise as a whole The bank’s review of the application is focused on two distinct aspects of risk:   Often more important! Improving MSME Performance through Cleaner Production. Module 8: Financing CP. Visit www.encapafrica.org.

12. Basis of Review #1Economic viability of the project ? How does the bank assess the economic viability of the project? NPV is the mostly commonly used overall indicator. HOWEVER, the bank will calculate multiple values for NPV using different assumptions regarding the performance of the project E.g. what is the effect on NPV of different sales, savings, schedules? Improving MSME Performance through Cleaner Production. Module 8: Financing CP. Visit www.encapafrica.org.

13. Basis of Review #2Company financial and economic status ? How does the bank assess the enterprise’s financial and economic status? • LIQUIDITYIs there cash on hand to pay day-to day operating expenses? • SOLVENCYDoes the company have the ability to repay outstanding long-term debt? • Prospects for future PROFITABILITYand its implications for both liquidity and solvency over the expected term of the loan. The bank assesses 3 Key factors:    Improving MSME Performance through Cleaner Production. Module 8: Financing CP. Visit www.encapafrica.org.

14. Barriers to Commercial Bank Finance for SMEs For SMEs, access to CP finance is constrained by: • Small size of SME CP Projects • Means that the bank’s administrative costs are very high compared to the profit it can make on the loan • High perceived risk of lending to SMEs • Insufficient accounting and business documentation (poor record-keeping) • Limited banking track record (no history of obtaining and successfully repaying loans) • Lack of security (collateral) Improving MSME Performance through Cleaner Production. Module 8: Financing CP. Visit www.encapafrica.org.

15. It is true thatsome barriers to commercial bank loans and (other CP financing) cannot be addressed by the SME alone ! BUT SOME BARRIERS CAN BE ADDRESSED Improving MSME Performance through Cleaner Production. Module 8: Financing CP. Visit www.encapafrica.org.

16. What can SMEs do to address these barriers? • Understand banks’ decision criteria and analyse CP projects in these terms • Improve record-keeping and management systems (utilize BDS services if available) • Identify banks that do have SME lending programs; request an informational interview with a loan officer before applying Improving MSME Performance through Cleaner Production. Module 8: Financing CP. Visit www.encapafrica.org.

17. Module 8: Financing Cleaner Production 8.2: General trends in CP financing in developing areas

18. “Friendly trends” in commercial banking We have now discussed many barriers to financing CP projects at SMEs HOWEVER, THERE IS GOOD NEWS. Some current trends in commercial banking are “friendly” to CP financing:  Increasing similarity among financial institutions Expanded commercial bank activity in developing countries Increasing interest in sustainable banking   Improving MSME Performance through Cleaner Production. Module 8: Financing CP. Visit www.encapafrica.org.

19. Increasing similarity among financial institutions Traditionally, different types of FIs specialized narrowly in their own areas. This is still true to some extent, but becoming less so. Many FI’s are expanding their product-ranges into others’ areas for borrowers, result is a wider range of potential sources of finance Be prepared to approach several different FIs of different types to raise finance on attractive terms  ! Improving MSME Performance through Cleaner Production. Module 8: Financing CP. Visit www.encapafrica.org.

20. Sustainable Banking FI’s are becoming more aware of their environmental responsibilities in lending. This emerging trend is focused in developing countries Thus, at many international banks, we see a shift. . . From traditional passive attitudes. . . Passive with respect to environmental issues. Resist responsibility for environmental impacts of projects they finance . . .to “sustainable banking” Reject financing of environmentally damaging projects. Recognize business & social benefits of environmental investments Improving MSME Performance through Cleaner Production. Module 8: Financing CP. Visit www.encapafrica.org.

21. Policy & development approaches to overcome finance barriers • Business development service providers can work with • SMEs, particularly to improve record-keeping • FIs, to demonstrate that CP investments pay • Special financing facilities for SMEs and for CP investments • Civil Society & business associations: Lobby Government for supportive policies Improving MSME Performance through Cleaner Production. Module 8: Financing CP. Visit www.encapafrica.org.

22. Module 8: Financing Cleaner Production 8.3: SME Financing in XXX.

23. This presentation to be developed specifically for the host country context Improving MSME Performance through Cleaner Production. Module 8: Financing CP. Visit www.encapafrica.org.

24. Module 8: Financing Cleaner Production 8.4: Participants’ experiences in financing projects.

25. Group Exercise:Analyzing past funding experiences You will identify one or more past funding experiences to CHARACTERIZE and ANALYZE, answering the questions on the following slides.  See exercise instructions in sourcebook Improving MSME Performance through Cleaner Production. Module 8: Financing CP. Visit www.encapafrica.org.

26. GROUP EXERCISE Past funding experiences Analyze your funding experience by addressing the following questions: The basics:What was the project? ? The financing search:Which sources of finance were considered?Which sources were then approached? ? The application:What information was required to make the application?Could you provide this information? ? AND Improving MSME Performance through Cleaner Production. Module 8: Financing CP. Visit www.encapafrica.org.

27. GROUP EXERCISE Past funding experiences The review:What were the funder’s criteria for approving or rejecting the application? Were these clear? Did any problems arise during the review process? ? The outcome; terms and conditions:Was financing obtained?What were key terms and conditions? ? Lessons learned:What do you think is the reason for your success/failure? What did you do right? What would you do differently? What advice can you offer from this experience?Do you still have unanswered questions from this experience? ! Improving MSME Performance through Cleaner Production. Module 8: Financing CP. Visit www.encapafrica.org.

28. GROUP EXERCISE Past funding experiences GROUP PRESENTATIONS.  Improving MSME Performance through Cleaner Production. Module 8: Financing CP. Visit www.encapafrica.org.

29. Some lessons learned by participants in past courses PROBLEM Solutions that worked ! Project profitability is poor Re-evaluate profitability using total cost principles ! management is unable or unwilling to issue more shares or to raise debt Lease capital equipment rather than purchase it. ! the firm does not have contacts with commercial banks Make contacts through the chamber of commerce, BDS provider, accounting firm Improving MSME Performance through Cleaner Production. Module 8: Financing CP. Visit www.encapafrica.org.

30. Some lessons learned by participants in past courses General Advice  Rejection from one FI indicates little.Search widely for alternative sources of finance. The larger the number of possibilities you consider, the more likely you are to obtain financing... and on better terms  If you are rejected, apply again when the national economic situation improves/ credit is loosened.  Seek advice from experts and from contacts in other firms Improving MSME Performance through Cleaner Production. Module 8: Financing CP. Visit www.encapafrica.org.

31. Do we agree with these lessons learned? ? ? What lessons learned can we add? ? Are these lessons fully relevant to CP financing? Improving MSME Performance through Cleaner Production. Module 8: Financing CP. Visit www.encapafrica.org.

32. Point for discussions Improving MSME Performance through Cleaner Production. Module 8: Financing CP. Visit www.encapafrica.org.