Getinet, these are both critical questions. In terms of availability of finance, a few thoughts: 1) From an investor perspective, the issue is often that finances are availability, but comfort level with SGB investment opportunities is not. In other words, the question becomes, how can more SGBs become more investable, and thus more appealing to people and institutions with financing available? 2) Networking is critical. SGB financing is still largely focused on key urban hubs (e.g. Nairobi), with less knowledge about and linkages to SGBs in rural and peri-urban areas. To help facilitate access to finance for these non-metro SGBs, facilitating networking and encouraging visits to business sites is useful.

Your second question, about efficient utilization of funds: as with all financial resources, planning is key! A common understanding between the financier and the business about intended use of funds (and mutual agreement about extent of flexibility), milestones for tracking progress, monitoring and a plan for action of milestones fall behind help set the stage not only for fund utilization, for for long-term relationship building.

The two trillion dollar question!

• Loan guarantees are certainly helpful - particularly if you're operating in difficult geographies/environments, very early stage businesses, and first-tme borrowers.
• Collateral is helpful to an extent - as pricing it, writing it into an enforcable contract, and calling on it can be complex, time-consuming, and expensive.
• Lending against purchase orders (trade credit) can be effective - particularly if you know the buyers well.  

But none of the above ensure repayment without transaction costs! If you're looking to make your money back without taking a lot of risk, it probably means investing via a financial intermediary - impact oriented or otherwise - in a sr. debt tranche. 

Due to the nature of agriculture lending, managing transactional costs is an uphill task.  However to keep it manageable, one must invest in market led product development and match the credit cycle with the crop cycles.  In some instances this might require you to accept ballon payments at the end of the cycle and after farmer payments have been effected.  One might also consider having the farmers pay the interest bit of the loan only for the time before harvest, and settle the principal and remaining interest post harvest and sales (moratorium on the principal).  This works best if the farmers are organized under a cooperative or buyer/aggregators.

Hi Jeannette, a bit more context might help here.  In which country are you referring to reform of secured transactions laws?  There are examples of debenture and other alternatives to traditional collateral in many countries in Africa where I was based.  In the case of the livestock, the business model of Juhudi Kilimo for example is asset-financing for livestock, e.g. a $1000 loan for a cow where the cow itself is the collateral.  

http://juhudikilimo.com/

In Kenya, institutions that use livestock as security, apply it when the loan is actually for asset finance to buy that particular livestock. The livestock is tagged and insured during the loan term and can be recovered incase of default. Livestock is rarely used as collateral esp by small holder farmers (emotive, hard to enforce)

While not in Guatemala, it's worth noting that there are lot of big initiatives right now targetin post harvest loss, which will include investing in private sector solutions.  One really interesting new one is YieldWise, a Rockefeller Foundation initiative in Africa: https://www.rockefellerfoundation.org/our-work/initiatives/yieldwise/

Hi Bruce, private sector funders expect monetary returns. 

As your project is more social and research inclined (for now), your best bet for financing will be a development partner who would invest for the benefit of the community and their ROI would be the impact on the farmers from your project.  You would then use the data to develop a for-profit model and scale to other regions

Hi Bruce, private sector funders expect monetary returns. 

As your project is more social and research inclined (for now), your best bet for financing will be a development partner who would invest for the benefit of the community and their ROI would be the impact on the farmers from your project.  You would then use the data to develop a for-profit model and scale to other regions

A function that has increasingly being used (e.g., the Tropical Landscape Bond in Indonesia) is setting up two separate facilities - a fund facility dedicated to actual investments, and a separate TA facility that raises and they deploys technical assistance monies to on-ground partners (enables the money to be earmarked). The TA facility acts as a de-risking mechanism and strengthens the actual investment deployment. Another resource to look at for blended finance instruments is the Canadian funded platform, Convergence. 

Mark, thanks for the great question. Like Martin, I also encourage you to check out Convergence - a platform for facilitating blended finance and also the development of new product/vehicle design. In my experience, funds often have parallel TA facilities (e.g. Africa Agriculture and Trade Investment Fund, Fund for Agricultural Finance in Nigeria) - which are often grant funded. The PRI model has also been used to cover initial TA costs. Many investors have noted the importance of TA in improving and expanding the investment pipeline, but I have seen few instances so far where the financing side has talked about investing in TA directly. 

Stepping back from the question of blending capital for TA specifically, and just thinking about the need for what we call "smart subsidy" in spaces that are high impact with risky returns, there definitely can be a role for credit guarantees in making finance available to SGBs that they otherwise couldn't access.  USAID's DCA is a good example of a 50-50 partial credit guarantee that I've researched and found successful in a number of cases of getting financial institutions to venture into the SGB lending space.  The 50-50 ensures that financial institutions have some skin in the game and thus see SGBs as a strategic priority, but provides some cushion for the risk of investing in high-impact, high-risk businesses.

Hi Myriam -

Root launched a dedicated "financial advisory" department after encountering this problem for 6 years with new prospective borrowers. We oftentimes use large workshop formats to help multiple groups better understand the loan application process and put together relevant documentation for our loan officers to review.

I was wondering if we can do better improving on locally available non-interest based sources of finance such as ROSAS for SGBs.

One thing you see in the SGB world is that it's not always the best ideas or most dynamic entrpreneurs that get invested, but those that are able to organize and professionalize themselves internally in order to speak the language of investors and assuage their concerns about risk.  Whether this is the ideal priority or not, if you want investment, getting internal systems right is critical.

Banks and local financial institutions are usually quite interested in participating in the sector, but a critical barrier is the financial maturity of the companies. Banks look for track record and a history (at least a few years) of successful operations (along with a business plan and forward looking projections - in this case, there are some local consulting firms, one in Kenya, that helps promissing businesses become investment ready through business planning support), and ideally other existing financing partners to derisk participation.

Additionaly, they need a pipeline of, in this case, SGBs, to justify participation for their internal credit committees (for department expansion, and even increased internal lending limit caps). If a bank has only 5 SGBs to finance over the coming 2 years, it's hard for them to justify economies of scale to particpate. The upfront due diligence cost is quite high irregardless of amount (in this sector), especially with only 5 companies; however, if you show a bank or syndicate of banks a strong and robust pipeline of investible opportunties over the next 5 years (call it 50 SGBs capable of absorbing financing responsibly in a specific sub-market), they will gladly particpate. 

An interesting model is using exsiting pipeline of other actors (such as NGOs or local aggregators) to aggregate pipeline and continue due diligence they're already doing for other projects, and then directing them to local FIs. 

During our first six years of lending to rural enterprises, we came to recognize that access to credit as a stand-alone financial service was often insufficient to spur the growth and success of our clients. Many rural enterprises lack the skills and experience to manage credit effectively (e.g., creating financial statements, budgeting, financial forecasting). In 2006, we launched our Advisory Services program to broaden the funnel of our lending pipeline, support enterprises in our portfolio through targeted training, and enhance the efficiency of loan officer due diligence

 Root has identified a number of ‘financial fundamentals’ that we use to determine the strength of an enterprise as well as areas for improvement (via workshops or targeted training). They include financial planning, financial statement creation & analysis, financial risk management, loan application preparation, internal credit management, and farmer financial literacy.

Similarly, as businesses grow, so do their needs for diversified loan products that often demand new management skills to maximize success.

Few things to keep in mind, the business must have a clear and replicable business model.   The enterpreneur must have the ability to give a succinct and convincing pitch on their business.  They must also have a good understanding of the financial model, including projections (best and worse case scenarios), cost and revenue drivers and ROI

re: Q1 - the answer is a very unsatisfying "it depends!"  

If ACCEPTING impact investment: I'd consider the trade-offs between all the potential benefits of an NGO status (including access to grant funding) versus the terms of a potential impact investment (e.g., access to networks, expertise, quantity of capital) - and all this in the context of how much capital you need for what.  We've also seen NGOs with fully-owned, for-profit subsidiaries - spun off for exactly this purpose.

If MAKING impact investments: As it sounds like you have very specific technological expertise, you might be well positioned to advise investment funds, and through them potentially place some capital of your own. This could be preferable to building out an entirely new veritical - investment capacity - which could be a distraction from your core busienss. Using investment/lending partners could also help you get a toe in the water to see if it's a place you really want to develop additional expertise. My two cents!

Hi Claire, thanks for your questions.

1. What returns are investors looking for: the reality is, it depends. The range of impact invesments is large, with some investors expecting market-rate returns and others expecting less in return for the social bottom line achieved. Also note that some impact investors will have specific geographic and/or certain sector preferences, and meeting those alongside return expectations will be important. As you consider adding impact investments, I encourage your organization to think about a) what sectors will you be asking investors to focus on? b) what geographies? c) what rate of return can you offer over the next 5 years? I suggest leaning towards the conservative side at this early stage. Your answers will help you identify the individuals/firms willing to take on the risk/return combination you're offering.

2) To the best of my knowledge, continental registration is quite a ways off. Even within economic communities like EAC, individual country registration and permitting is generally necessary and can be cumbersome. Building in longer-than-expected start-up time for expansion into a new country is generally recommended. Many hoops ahead, I'm afraid. However, showing permits and test results from one country can help accelerate the pace in a neighboring country.

Agree with Scott on the "it depends". More often than not, what I hear from impact investors or development focused funds, is that it's increasingly not about the rate of return but the amount of risk and their ability to hedge downside contingencies. Depending on the type of investor (running from high subsidized grant funding, to "market rate" debt/equity - which is still below traditional financial returns), they've become comfortable with a trade off for impact for return, which in my mind should not be the case (but a conversation for another time), but what it really comes down what are the different types of risks associated with your business (and how can they control it, and how it interacts with their broader portfolio in terms of sizing, geography, etc.). The pricing they'll use on a development ag investment will be attributed to risk. Typcial returns can range from at cost (grant funding), up to 1-5% (subsizied capital with a guarantee), 5-12% more "market rate" investors in the space. Please note these are highly generalized.