8/27/20151 Innovations for SME finance to counter the economic crisis Thierry Sanders Director & Founder BiD Network APEC SME Symposium Taipei, June

8/27/ a “declaration of ignorance” 1997

8/27/20153 Developing country SMEs seeking between US $10,000 – US $1 million 3 PNG Lighting US$ 200,000 Philippines Lobsters US$ 86,000 Vietnam FaceMasks US$ 15,000 Peru Postcards US$ 60,000

8/27/20154 BiD Network: Supports SME centers with Sourcing BPs, BP coaching, investors & internet ,000 members in 12 countries APEC members: Philippines, Mexico, Peru + interest from Indonesia, Chile, PNG, Thailand, Vietnam

8/27/20155 BiD Network helped start 300+ SMEs in 4 years Average $150,000 financing need +/-200 of 300 (66%) start without formal finance 10 direct jobs created within 2 years / SME 30 jobs created within 3 years / SME 4 jobs on average, per $60,000 invested / SME Cost per job: $1500 (BiD budget) or $15,000 invested Estimated 50% failure rate Aim for a 15% IRR 5 1/4

8/27/20156 Outline 1.Why are SMEs important? 2.Consequences of the Economic Crisis for SMEs 3.Innovations in SME Finance to counteract the crisis 6

8/27/20157 “The Missing Middle”  lack of finance is the biggest constraint to SME growth Contribution of business to GDP (IFC average) +/- 30% +/- 20% +/- 30% +/- 20% FinanceAvailability (indicative) > $2million $ 500,000- $ 1million $5,000– $ 500,000 $ 0– $ 5,000 International commercial finance Local banks & subsidized finance Localbanks, ‘hawkers’ & personalloans Microfinance, ‘hawkers’ & personalloans FinanceAvailability (Indicative ) > $2million $ 500,000- $ 1million $5,000– $ 500,000 $ 0– $ 5,000 International commercial finance Local banks & subsidized finance Localbanks, ‘Loan sharks’ & personalloans Microfinance, ‘Loan sharks’ & personalloans Missing Middle 1/4

8/27/20158 SMEs are job creators, exactly what we need in an economic crisis 95% of the poor earn their income from/via SMEs 40% of formal GDP and 50% of formal employment 70%-80% of formal + informal employment Sources: IFC msme database OECD Private sector development reports /4

8/27/20159 Consequences of the Crisis for SMEs 1)SMEs facing big problems 2)SMEs doing relatively well... and the big picture 9 2/4

8/27/ SMEs in the crunch 10 2/4 SME Low cash reserves Capital intensive Leased assets Paying off loans via foreign sources (e.g. remittances) Short term loans (1-2 years) Variable interest rates i.e. high debt-equity ratio Selling products for the middle classes Selling commodities Dependent on export sales i.e. The bigger formal-sector SMEs. Capital intensive, middle-class & export markets. The ‘financiable’ SMEs.

8/27/ SMEs doing relatively well 11 2/4 SME Labour intensive Low Debt/Equity ratio Reserves Restructuring from debt to equity Long term loans (3-10 years) Fixed interest rates Equity finance or suboordinated loans Selling products for lower classes Selling local markets Buyer of commodities Seasonal labour

8/27/ Sectors Hard hit -Mining -Energy & Utilities -Chemicals -Trade & Transport -Food processors (export) -Textiles & Manufacturing -Construction -Finance -Tourism Doing OK -Agriculture -Fisheries -Affordable consumer goods -Repairs -Supermarkets 12 2/4

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8/27/ Growth opportunities in 2009 are with SMEs & growth countries (IMF April 2009 data) 14 2/4

8/27/ Invest in the middle classes to safeguard SMEs 15 The Middle classes are: - Consumers - SME entrepreneurs - SME investors - Well educated The Economist, February 12th 2009

8/27/ ASIA is by far the biggest market among the poor. Income per person: < $ 3000 / year < $ 3,35 / day Brazil <$ 1,89 / day Ghana <$ 1,58 / day India Source: “Next 4 Billion” WRI 2007

8/27/ innovations for SME finance in times of crisis BanksInvestorsGovernments Debt-Equity SwapsDebt-Equity SwapsHelp liquidations Royalty FinanceMatching Fund Sourcing SMEsBusiness AngelsSME centers online Investor Services BiD-X 17 3/4 Finance Systems

8/27/ #1: Help liquidations Bancruptcy = breath of fresh air for the entrepreneur? Cancel payments to creditors. Cancel bank loans. But, lose collateral, debtors & reputation. And, restart with a healthy balance sheet. Law & regulations needs to support this. 18 3/4

8/27/ #2: Source SMEs from banks Banks are writing off bad SME loans. They have shortlists of poor-performing SME loans. Risky clients are interesting clients for investors, especially if the bank is rid of them for favourable terms & for SME is debt is replaced with equity. Investment scouts should talk to banks. 19 3/4 BiD Network service

8/27/ #3: Get SME Centers online Get your SMEs to register themselves & their BPs Organise BP competitions Get coaches involved Seek out the best BPs Organise investor meetings A good online platform can increase visibility domestically & internationally Organise an annual event for investors & SMEs 20 3/4 BiD Network service

8/27/ #4: Business Angel Networks Unlisted investments have investor interest These individuals are poorly organised Find them, organise peer-networking events Get them to learn from eachother Source & discuss deals together Co-invest, syndicate /4 BiD Network Latin America (Mexico)

8/27/ #5: Debt-Equity Swaps (revisited) Short term loans  Long term loans Variable interest  Fixed interest Loans  Suboordinated loans Loans  Royalty Finance Loans (bank)  Swap to Equity (investor) i.e. investor pays off the loan (principal + interest) to bank for an equivalent value in shares in the company. 22 3/4

8/27/ #6: Royalty based finance Loan Low fixed interest rate (~ 5%) Fee over the sales (~ 1%-5%) Penalty clause for early repayment Exit fee negotiable i.e. Pay more when the sales are good. Business Partners International – South Africa 23 3/4 BiD Network service

8/27/ #7: Matching funds 50% automatic matching by government of investment transactions. Government allocates money to a fund (€50 million). The fund manager (TechnoPartner, Netherlands) audits & approves participant investors & VC funds. Investment transactions by investors are automatically doubled by Fund, on the same terms as investor. 24 3/4

8/27/ #8: BiDx - online auction for SME financing (launch 2010) Established SMEs (€20,000 - € 2 million) Investors (€ ) We seek 1 more partner for US$ 750, /4

8/27/ BiD Network  /4 National Partner countries Peru, Mexico, Bolivia, Ecuador, Colombia, Argentina Kenya, Tanzania, Uganda, Rwanda, Jordan and Philippines Web community members* 25,000 Entrepreneurs* 7,000 Coaches 400 Investors 80 SMEs started* 300 Finance Leveraged* Eur 5 mln Direct jobs created* 2500 First year of operations 2005 * Since January 2005 Legal FormA not-for-profit “stichting” (Foundation) in Amsterdam

8/27/ Thank you !