An Overview Of Battle Bay Trading’s Proposal

for SME Access to Finance

Presentation to the PCED

16 November 2010

1

Content

Executive Summary 3

NYDA SME Survey 2010 4

Where are the Gaps? 5

What are the Issues 8

Demand : Diverse Need By Firms 9

What do we suggest? 15

What Services do we want to provide? 23

2

• Battlebay Trading is a black owned and controlled company that proposes to establish an arm that will focus on assisting small and medium size companies in South Africa to access funding.

• The academic literature around economic development indicates that a number of factors are important in ensuring SME succeed in developing countries. These include:

1. Access to Finance2. Lack of formal business knowledge by the entrepreneur

• Compounded by lack of access to useful information.• Insufficient training of the managers they employ.• Inadequate incentive structures and compensation model.

3. Lack of understanding of markets by the entrepreneur• Limited knowledge of potential suppliers.• Low awareness of competitive landscape.• Growth of strategies poorly adapted to current circumstances.

• The most commonly cited barrier to economic development in developing economies is insufficient access to capital in terms of both the quantity of available capital and the quality thereof, that is the terms upon which finance is offered.

• It is the experience in South Africa and other developing countries in Africa that entrepreneurs rely predominantly on internally generated funds (such as retained earnings) and informal sources (friends, family and informal lenders) to generate the capital they need for investment projects.

Executive Summary

3

NYDA SME SURVEY 2010

4

• It is also evident that owners of small and medium-sized enterprises and promoters of medium-sized investment projects are different to micro-enterprises and larger companies in terms of the ability to service their financing needs.

• While micro-enterprises have tested and successful financing models and larger companies combine deep relationships with financial institutions with large balance sheets to raise capital, small and medium-sized enterprises typically operate in environments where most financial institutions and investors do not have the skills to appropriately and profitably serve and engage with them. This relative lack of supply of funds to them is referred to the “missing middle”.

5

Where are the Gaps?

6

7

THE MAIN TARGET

1

50

5

200

Microfinance

Banks

Self employmentMicro enterprises

Small enterprises

Medium enterprises

Big enterprises

Medium and long term needs

Short term needs

PRIVATE SECTOR PROFILENo. of

employees

No. of firms

FINANCIAL SERVICES

TARGET

• “My government and I are aware of the obstacles that have prevailed small businesses – historical injustice which prevented the majority of South

Africans from gaining access to finance and other resources, restricted their access to major markets, and indeed, prevented millions of people from

becoming entrepreneurs. These practices have resulted in what is now a very distorted economy, in which so many small businesses and black businesses are confined to the margins of economic activity” - (Message from Former

President Nelson Mandela, in ‘ The President’s conference on small business, brochure, 1995)

• Development of SME has been an apex priority for almost 15 years. Given the aforementioned quote as well as what our current President highlighted in the State of the Nation address, there is a need to take cognisance of the lack of improvement in that regard.

• Improving the access to finance of small and medium enterprises is crucial in fostering entrepreneurship, competition, innovation and growth in South Africa. Access to sufficient and adequate capital to grow and further develop their activities is a difficulty faced by many South African SMEs. This situation is compounded by the difficulties in accessing finance as SME financing is considered by many financial providers as a high risk activity that generates high transaction costs and/ or low returns on investment.

• Moreover, SMEs need to meet the challenge of adapting to the changing financial environment and the increasing complexity and extent of financial report.

8

What are the issues?

9

DEMAND: DIVERSE NEEDS BY FIRM GROWTH CYCLE AS WELL AS SIZE

•Own savingsSTART-UP

NORMAL OPERATIONS

•Working capital

•Bridge Financing

•Discounting receivables

•Reinvestment of profits

•Term lending

•Equity investment

•Venture capital

•Trade credit

EXPANSION

10

MACRO ECONOMIC FRAMEWORKSituation

•Unstable economic context

•Finance concentrated on a narrow segment

•Resistance against the reduction of inequalities

•Ressisence against the assistance of Black Entrepreneurs

Possible Actions

Support for governments in implementing:

•expansion of Black Economic Empowerment policy

•policies in favour of investment in the « middle segment » of private sector

11

LEGAL AND REGULATORY FRAMEWORK

Situation

•Unsufficient security for property rights, colateral guarantees, recovery of loans, etc..

•Regulations rules not adapted to medium term loans

•Ceding of tenders and invoices

Possible Actions

Support for reforms, in favour of SMEs, of :

•civil and business law

•bank and financial regulations

12

INFRASTRUCTURE OF FINANCIAL MARKET

Situation

•Lack of secured informations about SMEs

•Cost of risk analysis too high for SME lending

Issues

Credit scoringCredit scoring: is it feasible in emerging limited markets? How to transfer the technology?

External ratingExternal rating: due to the cost of expertise, is it only available for highly competitive SMEs?

Credit bureauCredit bureau: analyse best practices in disseminating and sharing information on SMEs

13

COMMERCIAL BANKSSituation

•SME finance is not a natural, profitable segment for banks ‘activity

•But some banks, in a competitive context, are willing to bridge the SME finance gap

Possible Actions

Integrated assistance to banks, combining:

•refinancing avalaibility of medium term funds

•guarantee funds, properly designed cessions

•Advise on risk analysis and reduction of costs

14

VENTURE CAPITALSituation

•Well adapted to SMEs’ needs : bureaucratic-free and closely involved

•But tends to be reserved to highly competitive « big » SMEs : require a high level of profitability

Possible Actions

Analyze experiences of downscaling venture capital

Environmental measures facilitating mobilization of local private savings for SME investment

Develop new instruments combining equity and debt financing

What We Suggest?

15

Internally

Financial1.Exposure and guidance of SMME to Funding Mechanism

2.Exposure to Equity Investments

3.Access to Bridge and Working capital FUNDING..

Management1.Quarterly Supplier Summits to discuss Impact of Project

2.Early Supply Chain Involvement

3.Engagement with Private Sector

Developmental1.Integrated Emerging Supplier Development Programme

2.Special Purpose Mechanism

3.Promotion of Cooperatives

Compliance1.Signature of Invoice purchase agreement to Financier

2.Cession of Right to receive payment of invoice in favour of Financier

3.Early payment terms as Tool of Execution

Supplier Database

1.Allow for SME accessibility

2.B-BBEE Reporting functionality

3.Supplier listed per commodity

4.Supplier rotation, quarterly update of Approved Supplier List

Procurement1.Contract Unbundling

2.Setting additional Quotas for Youth and Woman

3.SCM Process initiatives and Monitoring

4.Demand vs. Supply Initiatives

Externally

Proposed Implementation Overview

Achievement Of Targets

National Provincial and

Local Government

National Provincial and

Local Government

Limited Resources

Limited Resources

Ample Resources

Ample Resources

Strategic Plans/Projects Strategic Plans/Projects

17

SUPPLY: A SYSTEMIC PROBLEM

•Macro economic frameworkENVIRONMENT LEVEL

FINANCIAL SECTOR LEVEL

•Market infrastructure

•Commercial banks

•Bridge Financing institutions

•Business Associations

•Networks and clusters

•Procurement Platforms

•Legal and regulatory framework

•Other finance institutions

FIRM LEVEL

18

MUTUAL GUARANTEE FUNDSSituation

A dynamic partnership which reinforce the banks’interest by:

•sharing risk through financial solidarity

•adding a judgment on human an professional qualitites of the applicant

Possible Actions

Analyze success stories of functioning mutual guarantee funds and networks, particularly in western countries

19

BRIDGE FINANCINGSituation

• Bridge Financing reduce SME finance gap by lowering risk and transaction costs

•But there is a lack of Bridge Financing companies, due to regulation constraints

Possible Actions

Analyze lessons of experience with SME bridge financing

Regulation reforms encouragement of bridge entities to assist SME

20

BUSINESS ASSOCIATIONSSituation

Generally Business Associations lack institutional capacities, and are weakly representative of SME segment

Possible Actions

Support Business Associations to act efficiently to reduce SME financing gap, through:

•dialogue with the State to improve environment

•organisation of mutual funds, collaboration with financial institutions to guide their services

•training or certifying of SMEs to lower risk level

21

NETWORKS AND CLUSTERSSituation

These SMEs’ grassroot organisations can play a powerful role to reduce SME finance gap at the 3 levels of environment, financial sector and non-financial support for SMEs

Possible Actions

Projects supporting networks and clusters of SMEs, where the financing needs have been successfully tackled

22

SUPPLIER SUMMITSituation

indirect access to manufactures creates inflated margins as SME try to make a profit

Internal weaknesses of the firms in relation to investments

information assymetries: difficulties ot the SMEs to provide relevant required data

Lack of direct involevement by Large corporate except to meet Enterprise Development targets

Possible Actions

A quaterly supplier development summit that also creates Procurement platforms for the suppliers

What do Services do we want to provide?

23

24

SERVICE REQUIRED DELIVERABLES

Industry Spend Analysis • Capital Expenditure (Capex) • Maintenance, Repairs and Upgrades (Capex) • Operational Expenditure (Opex) • Structuring of agreement with Financiers• Structuring of agreement with Manufactures

Supplier Industry Analysis • Strengths and weaknesses of supplier cluster from supplier’s perspective • Analysis of SME financial standing and levels of delivery• Introduction of bespoke SMME bridge and working capital products from Financiers• Priority areas for competitiveness improvement and localisation • Sustainability of increased purchase directly from manufactures

Priority Interventions and Associated Sectors

• Input sector interventions • Tiers one (SMME), two and three supplier interventions • Maintenance, Repair and Upgrade related interventions • Skills development interventions

Thank You

BATTLE BAY TRADINGKgomotso Selokane

Thabang Moropa

25