Factor Finance for Procurement
Factor Finance for Procurement (3FP) developed out of our experience from the Sustainable Market Initiative and addresses the challenge of access to finance for Small and Medium Enterprises (SMEs) in developing countries.
Our staff saw that the local entrepreneurs and SMEs, who we had helped win contracts, were often hamstrung by a lack of access to credit. Given the typically significant up-front costs of international procurement contracts, and the slow payment rate of the large buyers, the local companies are forced to compete with a disadvantage. While entrepreneurs and SMEs have tremendous potential to contribute to the economy, they are often categorized as the “missing middle” in developing countries, where the private sector tends to be dominated by microenterprises and large corporations.
The Need: The Missing Middle
The “Missing Middle” is particularly true in the countries in which we operate, where large companies in the extractive industries dominate the private sector—and where conditions are not conducive to private-sector activity in general. In Liberia, SMEs provide the main source of income for the majority of households—80% or greater provide the backbone of family welfare. Also in Mozambique, SMEs are key actors in almost every production system. However, despite their importance in both economies, they face considerable challenges, including access to markets, capacity building, and financing. On the finance supply side, commercial banks find the SME segment potentially attractive; however, they are unable to provide access to credit because they lack the internal resources necessary to identify and assess the risk of SMEs.
The Solution: Factor Finance for Procurement
We came up with an idea to overcome this problem. We learned that we can leverage our relationships with local businesses and large buyers to establish linkages with local banks and investors, thereby increasing access to finance for SMEs. The 3FP Fund has three key components: (1) identification and technical assistance, (2) buyer engagement, and (3) catalytic financial services.
- Identification and technical assistance: Given the extensive data and knowledge of local business landscapes developed through our existing SMI programs, we can identify investment- or credit-ready candidates, provide training and advice, and advocate on their behalf.
- Buyer engagement: Building Markets can help improve the credit profile of a business by involving buyers in the credit assessment process, and by facilitating interactions between the lenders or investors and the buyers.
- Catalytic financial services: 3FP works with different financial instruments to catalyze financing to local businesses in need of capital. 3FP may offer a number of different services, including invoice factoring to improve business liquidity and partial risk sharing agreements for loans from local bank partners. In addition, 3FP is well positioned to promote growth capital for qualified businesses.
The 3FP concept was named a People’s Choice Winner by President Obama and Canadian Prime Minister Harper as part of the G-20 SME Finance Challenge. Launched in September, 3FP has been rolled out in Liberia and Mozambique.