Foreword. FinMark Trust: Supplier Chain Credit Report 3

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1 S U I T E A / 1, L O U R G A D I A B U I L D I N G, C N R H E N D R I C K V E R W O E R D A N D EMANKMENT ROAD CENTURION P H O N E : FAX: E M A I L : t h a b r u d o c o n. c o. z a ; m a t l o d r u d o c o n. c o. z a FINAL REPORT: An investigation into the quantification and extent of supply chain finance to small, medium and micro enterprises. PREPARED FOR: FinMark Trust PREPARED BY: RUDO RETAIL DATE: 20 MARCH 2010

2 Table of Contents Foreword Executive Summary. 05 Chapter 1: Background and Introduction Purpose of the study Objectives Methodology Challenges in achieving the objectives of the study Contextual Analysis. 15 Chapter 2: Sources of finance available to an SMME 17 Chapter 3: Supplier Chain Finance in South Africa Asset finance Working capital/production loans Factoring and reverse factoring 25 Chapter 4: Supplier Chain Finance per Sector General Agricultural Sector Sugar Agricultural Sector The Retail Sector Food and Beverages Sector Petrochemical Sector Office Automation Sector Telecommunication Sector Mining Sector Forestry Sector Building and Construction Other Sectors 49 Chapter 5: Lessons Learnt 50 Conclusions. 51 Recommendations. 53 References. 54 Annexure A: The Niche Case Study 55 Annexure B: The Ubuntu Case Study. 56 Annexure C: Macha s Case Study 57 Annexure D: The Nafin Case Study 58 Annexure E: The WallMart Case Study Annexure F: List of Interviewees. 60 FinMark Trust: Supplier Chain Credit Report 2

3 Foreword A value chain represents the full range of participants and value adding activities engaged in to produce products for the final consumers. An example is that of a farmer who gets inputs such as seed and fertilizers from an input supplier, works the land and produces maize and sells these to other value chain participants such as millers who process and pass on to wholesalers and in turn retailers from where the consumer buys the final product for consumption. Such a farmer would typically source his finance from a bank to finance his/her input requirements including labour and irrigation costs. Alternatively, the farmer can get the inputs financed by the miller through tied credit where the arrangement is for the farmer to produce and market the crop exclusively to the processor from whom production finance was provided. Value chain finance can be provided within these intricate relationships amongst participants of any chain either as an embedded service or as a standalone service. The provision of value chain finance therefore represents an important departure from traditional lender finance. This is particularly important as different value chains have different levels of integration depending on the levels of competitive forces that they deal with. Similarly, different value chains have varying finance needs. Within highly competitive market environments where competition is fierce and markets are largely globalized, it behoves stronger value chain participants to collaborate and strengthen their weaker value chain participants. An example is that of a processor who requires produce from smallholder farmers in order to produce the final product. Without sufficient volumes of produce flowing in from the farmers, the viability of the mill is seriously compromised. In this case, the processor may find it prudent to provide value chain finance to the smallholder farmers to ensure quality produce is delivered timely in sufficient quantities for processing. Another key competitive issue in the South African environment is the BBBEE policy and its requirements for collaborative action amongst value chain participants in the form of large operators opening up their supply chains to SMMEs. This imposes additional requirements for the larger value chain operators to strengthen the SMMEs in their value chains through business services and other means such as value chain finance in one FinMark Trust: Supplier Chain Credit Report 3

4 form or another in order to maintain their competitiveness. This is premised on the understanding that a value chain is only as strong as the weakest link. The objective of this study was to examine and quantify value chain finance in selected sectors. Given the large size and diversity of sectors in which SMMEs are found, the most logical way to approach the subject is to profile selected sectors, sift out emerging practical profiles of value chain finance and detail the approaches followed in adopting those models. This study provides a case study model/approach to value chain finance in selected sectors in South Africa. By its very nature, a study such as this one provides the preliminary basis for further detailed work to critically examine best practices for linking value chain participants in a manner that increases the supply and efficiency of finance to different participants and indeed to the whole value chain. It also creates a platform for comparison of terms of trade and efficacy of finance provision between traditional lending and value chain finance. Golden Mahove Business Trust FinMark Trust: Supplier Chain Credit Report 4

5 Executive Summary One of the major challenges facing the South African government currently is the high unemployment rate standing at 48% for the African majority and 28% for the population as a whole. Entrepreneurship has a distinct role to play in the South African economy, not only to solve the unemployment issues but also to act as a poverty alleviation mechanism. However, research 1 conducted by FinMark Trust has found that access to finance is one of the biggest challenges faced by SMMEs which interferes with the development of this industry. According to a report compiled by PERC 2 the biggest reason for this is that creditors have little knowledge about the payment behaviour of SMMEs and as a result are either reluctant to provide finance or require collateral which SMMEs are unable to meet. It is critical therefore that non-bank solutions be made available, so that SMMEs can have access to more alternative sources of finance. There is anecdotal evidence that suppliers of goods and services are fully aware of this and in an effort to secure increased sales and market share, resort to offer some funding mechanism to facilitate a sale to a SMME that operates in its supply or value chain. There is considerable literature available on trade credit 3 theory and how empirically firms benefit from them. However, there is very little literature on the position of supply chain credit and its role in the overal finance supply continuum to SMME s. This report details the findings of the research on the fairly new concept in the South African SMME finance regarded as supply chain finance 4. This is broadly defined as a type of finance where a large business directly or indirectly facilitates finance to a small business that operates within the supply or value chain of the big businesses. The big business provides finance 5 to a small business that is a supplier, client or associate of the big businesses. As explained in detail in the report, this finance model is an alternative 1 FinScope Small Business Survey of The Centre for Competitive Credit at the Political & Economic Research Council, Information sharing and SMME Financing in South Africa, A survey of the Landscape Trade credit is defined as an extension of payment terms e.g., payment terms over 90 days for goods and services. 4 Note that literature from the Americas often uses the term supply chain finance in the context of invoice factoring. 5 In this study finance means a loan or other form of financing excluding typical trade credit. FinMark Trust: Supplier Chain Credit Report 5

6 source of finance for an SMME and excludes trade credit. The table below illustrates where supply chain finance fits into the finance supply continuum. Bank /Formal Non-Bank (Government DFI) Supply Chain Finance Informal credit SMME profile Credit worthy May have collateral Have credit worthy customers SMME not credit worthy SMME has no collateral SMME needs start-up finance SMME limited credit track record no collateral need start up or working capital finance SMME not credit worthy, no collateral and need start up finance Micro business requiring small amounts of capital Requirements A solid business model or contract. A solid invoice that can be cleared at the Invoice Credit Bureau A good credit profile Tender contract Tax Clearance Certificate RFI to be made a bank signatory SMME must be a supplier/client or associate of a large business Must be a BEE or woman owned company Often part of development programme of the large business SMME must have acceptable credit risk profile for informal lender Suitable (likely) Source of finance Loan from bank Formal financial institution DFI Khula /IDC Retail Financial Intermediaries Supply chain finance (Large business directly or indirectly facilitating finance) Friends/Family Credit co-operative Micro lender Debtor or invoice factor product from a bank or factor company The concept of supply chain finance is closely linked to what the United Nations Development Programme describes as inclusive business models. With an inclusive business model, large businesses explicitly aim to integrate the poor into corporate value chains in economically viable ways as entrepreneurs, suppliers, distributors, retailers, consumers, employees, or sources of innovation. FinMark Trust: Supplier Chain Credit Report 6

7 Key Findings 1. Supply chain finance appears to be widespread and have been in existence for over 20 years in the mining sector. Although the study did not address every economic sector in South Africa, supply chain finance appears in various sectors of the economy as indicated in the table further below. In the mining sector, Anglo American has provided SMME finance for more than 20 years and has developed sophisticated supply chain finance models that involve equity ownership and extensive technical support. The agricultural sector has a structured and organised manner of providing nonbank funding to its SMMEs. This sector is dependent on co-operative structures with an estimated finance book of R10 billion. The debt book is mostly in the form of production loans and asset finance. However, there was little evidence that the construction sector is active in this arena, despite the fact that SMMEs contribute more than 30% of the turnover of this sector. 2. Supply chain finance is an effective way of granting finance and gives the SMME an important stepping stone to qualify for formal credit. Supply chain finance can be an effective source of finance as:- Large businesses are well equipped to identify worthy candidates for finance as their procurement and distribution divisions deal with these SMMEs on a daily basis. The large business knows the business outlook and circumstances of the SMME and based on this grass roots knowledge can make a sound finance decision. The financial support by a large business provides a vital stepping-stone for an emerging business from which this small business can build a good credit record in order to qualify for formal funding. 3. Supply chain finance is mostly unsecured and at relatively inexpensive rates. In all sectors investigated, apart from the agricultural sector, credit is mostly in the form of unsecured loans, with interest charged from prime -2% to prime +2% lending rates. Commercial banks are unlikely to grant loans at less than prime plus 2% to a SMME or start-up businesses. Although finance is mostly unsecured, indirect collateral manifests when the small supplier delivers the goods and the large business then first deducts a FinMark Trust: Supplier Chain Credit Report 7

8 loan instalment as part settlement of an invoice. In addition, in many instances the loan is accompanied by direct interventions in the form of financial education and technical support that mitigates the risk of default. 4. Supply chain finance developed substantially with the advent of Black Economic Empowerment (BEE) legislation In recent years, supply chain finance has been driven largely by BEE considerations. In order to comply with BEE legislation large businesses earn points on a BEE scorecard based on the extent that they develop small enterprises in their supply and value chains. That said, it has turned out to be a sustainable model of finance that should be further encouraged. 5. Large businesses indirectly facilitate finance if not willing to be a financier in their own right Many of the large corporations approached during this study have enterprise development divisions. Although some do not provide direct finance, they indirectly facilitate finance to SMMEs that operate in their supply chain. This takes the form of extensive technical support, financial training, mentorship, internships and business linkages for SMME suppliers, clients and associates. This in turn creates a fertile environment for the SMME who participated in these programs to qualify for a loan from a formal financial institution. Thus, although only indirectly, these various enterprise development programs significantly enhance the potential for SMMEs to access finance. 6. Government and retail financial intermediaries have a partnering role to play in supply chain finance. Some companies seem reluctant to offer supply chain finance because they do not regard credit provision as their main business. However, the study have found numerous instances where large companies have partnered with RFIs or bridging financiers to offer a supplier or client in their supply chain a credit package where the source of funding originated form a government institution like Khula. FinMark Trust: Supplier Chain Credit Report 8

9 Recommendations: 1. Explore the development of sector specific RFIs or funding, learn from the agricultural sector: The member based cooperative finance model in the agricultural sector illustrates that sector specific finance has an important role to play to improve access to finance. It is recommended that the likes of Khula set up sector specific funds from which enterprise development managers in large corporations can either directly become an RFI or partner with the sector fund if they do not want to manage a SMME fund directly. 2. Encourage and establish finance linkages between SMMEs, large corporate, and formal financiers: Although this study did not aim to do an in depth study of invoice or reverse factoring, this appears to be an under-developed source of funding. Now that South Africa has an established supply chain finance industry, a natural progression would be the formation of invoice factoring mechanisms that facilitate finance to SMMEs. This means that the likes of a SA Breweries could collaborate with a formal financial institution or RFI so that the SMME can benefit from a factor product. The vehicle for such co-operation could be via BankServ s invoice clearing bureau. 3. Strengthen Capacity Building Interventions for SMMEs, before granting finance: Every single fund, enterprise development manager and SMME expert interviewed for this study mentioned that as far as overall support to a small business is concerned, finance is actually not the most important component to guarantee success of the small business. All parties interviewed mentioned first and foremost that the person running the SMME must have entrepreneurial flair and a strong will to make the business work and grow. No amount of finance or mentoring and technical assistance can make up for instances where the principal of the SMME does not have the entrepreneurial flair or technical capabilities. FinMark Trust: Supplier Chain Credit Report 9

10 Table 1 below details the summary of large corporations involved with supply chain finance and related activities. Sector Direct supplier chain credit activities Indirect supplier chain credit activities Agriculture There is extensive lending by general cooperatives to small and large scale farmers. Loans are mostly secured through land or farming equipment. A typical loan size is from R The interest rates range between prime -2%- to +2%. The total agricultural industry supplier chain finance book is approximately R10 billion. Small farmers account for approximately 25% of total debt book. Sugar Agriculture There is low activity of supplier chain credit in sugar agriculture There is a sugar company with a fund of approximately R100m in partnership with Khula and offers unsecured loans to farmers. The interest rate from this fund is between 12.5% to 14.5% Retail sector There are few cases of supplier chain credit in the retail sector Generally, the credit is in the form of unsecured loans between R and R2 million. The interest rate is normally below prime Repayment term ranges between 3 months and 5 years. The sugar agriculture industry seems to prefer indirect finance. This is done mostly by facilitating Landbank loans with mechanisms of guarantee and immediate settlement of invoice when small scale farmer deliver cane to the mill. The sugar industry as a whole has well structured capacity development programs for small scale farmers which enable the farmer to qualify for formal finance. Most retailers seem to prefer the indirect finance model, where a retailer: Pays its suppliers invoices within 7-10 days, and Supplies stock on an interest free basis for new franchise owners. Partner with Khula to finance new franchise owners. FinMark Trust: Supplier Chain Credit Report 10

11 Sector Direct supplier chain credit activities Indirect supplier chain credit activities Beverage The beverage companies consulted have a policy not to provide direct finance to SMMEs. However, they have a very strong preferential procurement policy on black SMMEs. This and extensive development and capacity programs of owner-drivers, small scale farmers and tavern owners equip these SMMEs with a profile that makes it easier to access finance from a formal financial institution. Petro-chemical No reported cases of supplier chain credit Mining The mining sector has extensive levels of supplier chain credit Anglo Zimele small business start-up fund has provided loans in excess of R52m since 2007 and has provided assistance to SMMEs that employ more than people. Interest rates are at 10% The Anglo Zimele Supply chain fund provides loans of up to R5m to suppliers of Anglo American. Interest rate is at prime +1%. The Anglo Khula mining fund provides loans of up to R20m for exploration and junior mining. Interest rates are at prime. Others The results indicate that the transport industry have incidence of supplier credit finance, although not extensive. A transport and logistics company has a R35m fund that is targeted at providing empowerment loans in order to transform white owned businesses into black owned businesses. Within the forestry industry, Mondi Zimele has a finance fund of R70 million of which R35m has been disbursed. Interest rates are in the region of the prime rate. Petrochemical companies also provide indirect assistance through its BEE initiatives There were no reported cases of supplier chain credit within the building and construction sector; instead, most retailers assist SMMEs through trade finance. FinMark Trust: Supplier Chain Credit Report 11

12 CHAPTER 1: Background and Introduction SMMEs often experience considerable constraints when accessing finance from formal financial institutions. In the history of financial support to SMMEs, the issue often revolves around the role of banking and non-banking financial intermediaries that offer direct lending products to this market. Undoubtedly, with direct lending, banks and formal financial institutions serve a role in the volume and range of products they can offer to small businesses. Yet, they seldom veer from conventional lending methodologies, such as requirements for collateral, which SMMEs are usually unable to provide. This study was embarked upon after it became evident that large businesses are aware that small businesses are vulnerable in as far as sources of funding are concerned and in order to secure this small business as either a supplier or client, it has little choice but to offer some form of financial assistance. Should the SMME be a supplier of the large business, the business will inevitably make money available to the SMME to ensure that it can deliver products and/or services to the business on time and in sufficient quantities. Where the small business is a client, the success of the client will assist the large business to increase its market share and footprint. Purpose of the study The purpose of this study was to gain a better understanding of supplier chain credit in South Africa. The main focus was on instances where a large business provides direct finance or indirectly facilitates access to finance for a SMME that is a supplier, client or associate of the large business. This study specifically excludes an analysis of trade credit which is short term in nature, and on which there is significant literature available. Although the study focuses specifically on South Africa, literature and case studies from elsewhere in the world contributed to key lessons learned. FinMark Trust: Supplier Chain Credit Report 12

13 The objectives of the study included:- Determining the sectors of the economy that are most active in terms of instances where large businesses provide finance to small businesses within their supply/value chain. Determining the terms of credit granting Determining innovative terms of credit granting and criteria for expanding the supplier chain finance market as a mechanism of increasing finance to SMMEs. Quantifying the size of finance granted within the supply/value chain. Methodology The methodology involved a combination of desk research and qualitative interviews with SMME experts and large businesses involved in the provision of finance to suppliers and clients in their supply/value chains. The methodology adopted during this research is set out below. Desk research in the form of literature review and secondary analysis: The point of departure was to investigate other studies undertaken both locally and internationally that deals with finance models in the supply and value chain. Unfortunately this is not a well documented and researched topic. However the desktop revealed important source of information and that is the Annual financial reports, Sustainability reports and Enterprise development reports from which a wealth of secondary data was gathered. Exploratory interviews with industry experts and stakeholders: As indicated in the terms of reference, very little research is available on supplier chain credit. Thus the researchers interviewed experts who assisted with information on the landscape of value chain credit, and provided valuable leads on people to consult with for more information. Interviews with large corporate organizations that are engaged with supply and value chain financing: From the desk research and exploratory interviews, a number of large corporations were identified who are involved with finance to SMMEs. Individuals from large companies were interviewed in order to establish the nature of the credit, how the credit is structured, why the credit was granted, lessons learned etc. Case studies illustrated in the report were sourced from these large organisations. Annexure B contains a list of persons contacted whilst conducting the research. FinMark Trust: Supplier Chain Credit Report 13

14 Case study interviews: In order to gain first hand knowledge from SMMEs who benefited from financed granted by a large corporate a few SMMEs were interviewed. Sector focus The study initially aimed to address at least the following economic sectors: Agriculture Retail Petro-Chemical Beverage Office equipment/services However as the study progressed, it was found that there were good examples outside of the sectors and these were included. They are mining, building and construction as well as the forestry sectors. Challenges with achieving objectives of the study We found the objectives as set out at the start of the study to be challenging in two ways. Firstly, to quantify the market for supply chain finance one needs to conduct a formal survey of a significant portion of large businesses in South Africa. As this was mostly a scoping exercise it was decided to focus on those entities that the deskwork identified as significant players and document the fund values of these. It is recommended that a future survey is conducted to just focus on quantifying the supply chain finance market. In addition contrary to what was first expected, little information could be sourced on certain sectors as either we were unable to track information on activities in corporate publications and or key persons in the organisations did not respond to numerous attempts to engage with them. However, the desktop revealed that there were good examples outside of the sectors initially targeted and these were included. FinMark Trust: Supplier Chain Credit Report 14

15 Contextual Analysis The study objectives specified five economic sectors to be investigated, which included agriculture, retail petrochemical, beverage and office equipment/services. The aim was to determine the extent of supplier chain credit in each sector, determine the major players per sector and determine how the funding/credit is structured in each sector. However, it is important to first understand the economic infra-structure of the country and the extent of SMME 6 activity in each sector. Table 1 reflects the major economic sectors in South Africa. The second column details the respective sector contributions to the South African economy. The last column provides the percentage share that small businesses contribute to the overall turnover of the sector. Table 1: Gross Domestic product of South Africa South African Gross Domestic product per sector Percentage contribution to SA GDP (%) Percentage share a SMME has of sector turnover (%) Agriculture, forestry and fishing Mining and quarrying Manufacturing Electricity, gas and water Construction Wholesale, retail, motor trade catering and 29.9 accommodation Transport, storage and communication Finance, real estate and business services Government Personal Services Total value added Gross domestic product at market?? * * Percentage of total business turnover in SA Source: StatsSA Source StatsSA, Nov annual financial statistics 2006 Finance, real estate and business services seem to be the largest GDP contributors and have a significant percentage of SMME activity at 49.9%. Although manufacturing is the 6 It is important to mention at the outset that this paper is not intended to provide guidance or give a finite definition for size parameters of Small, Medium and Micro- Enterprises. Thus, examples of SMME finance included here are based on a subjective definition of SMME which differs from sector to sector. FinMark Trust: Supplier Chain Credit Report 15

16 second largest GDP contributor, the SMME activity in this sector seems relatively less at 18.7%. Construction has the second highest SMME activity in the country at 38.6% followed by personal services, wholesale/retail and agriculture and forestry. The research has established that there are limited finance options for small businesses in the building supplies sector, regardless of the fact that construction makes up a significant portion of GDP and within the construction sector small business activity accounts for a large part of the sector turnover. Although the study specifically targeted sectors identified in the scope as mentioned above, the report included examples of supplier chain credit in other sectors. To illustrate, some of the oldest models of supplier chain credit is found in the mining sector. This is despite the fact that small business contributes little in terms of the turnover of the sector. The retail sector is another sector where innovative financing has been established. Retailers like Woolworths have developed creative ways of financing their suppliers in the form of short-term loans and BEE loans. Metro Cash and Carry have partnered with Vengrow Capital in order to assist SMME with in-house financial solutions. The agricultural sector which also has a significant number of SMMEs contributing to the sector s turnover at 12% was found to have the most developed and structured models of supplier chain credit. FinMark Trust: Supplier Chain Credit Report 16

17 CHAPTER 2: Sources of Finance available to an SMME Bank /Formal Non-Bank (Government DFI) Supply Chain credit Informal credit SMME profile Credit worthy May have collateral Have credit worthy customers SMME not credit worthy SMME has no collateral SMME needs start-up finance SMME limited credit track record no collateral need start up or working capital finance SMME not credit worthy, no collateral and need start up finance Micro business requiring small amounts of capital Requirements A solid business model or contract. A solid invoice that can be cleared at the Invoice Credit Bureau A good credit profile Tender contract Tax Clearance Certificate RFI to be made a bank signatory customers SMME must be a supplier/client or associate of a large business Must be a BEE or woman owned company Often part of development programme of the large business SMME must acceptable credit risk profile for informal lender Suitable (likely) Source of finance Loan from bank Formal financial institution DFI Khula /IDC Retail Financial Intermediaries Supply chain finance (Large business directly or indirectly facilitating finance) Friends/Family Credit co-operative Micro lender Debtor or invoice factor product from a bank or factor company Information collected during this project indicates that a typical South African SMME has access to various possible sources of finance, and these are detailed in this section of the report. These include formal funding that can be sourced from commercial bank, formal financial institution or venture capital company banks, and semi-formal funding from micro lenders and cooperatives respectively. FinMark Trust: Supplier Chain Credit Report 17

18 The graphs below indicate the result of a World Bank survey related to finance sources of businesses interviewed. Figure 1 indicates that 22% of small firms interviewed have access to finance from a financial institution. Figure1 Figure 2 is related to our research focus of supply chain finance indicating that between 3% and 17% of firms interviewed benefited from finance from a supplier or customer. Figure 2 FinMark Trust: Supplier Chain Credit Report 18

19 Figure 3 shows that 22% of small firms benefited from working capital finance, which appears to include trade credit. Figure 3 The research found that most of the funds from these sources are in the form of term loans, working capital loans, factoring 7 loans, both short term and long terms as most finance institutions fear steering away from the conventional lending methods. In July 2007, the South African Invoice Financing System was launched by the Banking Association. This invoice finance is aimed at providing entrepreneurs with working capital by financing their invoices. Although the invoice is utilised as security, a clear credit record is necessary. 7 Although factoring is not essentially regarded as a loan this type of transaction plays an important role in assisting businesses to access capital. Historically, factoring has been consistently used in certain Western European countries, Japan, and the United States, primarily using domestic receivables as a source of financing working capital. The use of factoring is growing substantially in many less developed countries where obtaining alternative sources of supplier financing is particularly challenging, especially for small and medium-sized enterprises. (Feinberg,200) describes factoring as a financial transaction whereby a business sells all of its accounts receivable (i.e. invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business. Factoring differs from a bank loan in three main ways: Firstly, the emphasis is on the value of the receivables (essentially a financial asset), not the firm s credit worthiness. Secondly, factoring is not a loan it is the purchase of a financial asset (the receivable). Finally, a bank loan involves two parties whereas factoring involves three. FinMark Trust: Supplier Chain Credit Report 19

20 The South African government also plays a significant role as a source of public funding. These funds are managed by the Department of Trade and Industry through small business initiatives including the South African Microfinance Apex Fund (SAMAF), Khula Enterprise Finance (Khula), the National Empowerment Fund (NEF), and the Industrial Development Corporation (IDC). Khula has embarked on an innovative strategy to improve access to entrepreneurs by establishing Retail Financial Intermediaries (RFIs). These are non-financial organisations/ngos which receive funds from Khula to disburse to SMMEs in the form of working capital finance, order and invoice finance, contract finance for contractors and start-up finance. Khula has accredited almost ten (10) RFIs all with a national footprint. The RFIs mostly finance contractors, suppliers of goods, agric businesses and hawkers. 65% of the RFI funds disbursed went to black owned enterprises and 32% to womenowned companies. Vengrow Capital is a Khula RFI which has partnered with Metro Cash and Carry. Vengrow provides funding in the form of trade credit to SMMEs who have a Met Cash card and previously received funding from Metro Cash & Carry. What this implies is that Metro was a direct financier of some of their clients previously. They have subsequently stopped this facility and allowed Vengrow Capital to establish kiosks within Metro stores. In this study, trade credit is a type of credit extended by one business to an SMME, allowing the SMME to buy goods from the business without making immediate full payment by cheque or with cash. It is credit obtained through open-account purchases represented by an account payable by the buyer and an accounts receivable by the seller. Trade credit is usually repayable based on 7, 14, 30, 60 or 90 day terms with a cash discount for early settlement. This is an important external source of working capital for a business, although it can be very expensive. For example, a credit of 2/10 net 30 (2% cash discount if paid within 10 days, otherwise due in 30 days) translates into a 37% annual interest rate if the cash discount is foregone. FinMark Trust: Supplier Chain Credit Report 20

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