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

21 Khula is also a 20% owner of Regent Factors which specialises in full factoring (debtors book finance) and reverse 8 factoring (specific invoice factoring). Klapper L (2007) points out that, reverse factoring has many advantages including:- The lender purchases accounts receivable from only high quality buyers, thus only needs to collect information and calculate the credit risk of the often large and transparent client of the SMME. The credit risk, and thus interest rate, is favourable as it takes in to account the default risk of the high-quality customer and not the risky SMME. The transaction is not based on the SMME s ability to repay, but the finance is based on the supplier s customers credit worthiness and in the South African context, the customer is often the SA government (national, provincial and local). That the risk profile is transferred to the government or the corporate customer. Over time, reverse factoring transactions pave the way for cross-selling finance products, for example fixed asset finance. Informal borrowing and self-funding: The Finscope Small Business 2006 survey for Gauteng confirmed that loans from friends and family are the main source of finance for a small business. SMMEs use own savings, group savings (stokvel), and funds from retrenchment packages. SMMEs also borrow from a Mashonisa at very high cost. Non-government development fund institutions are funds established from contributions in the private sector but specifically with a developmental focus, thus on a not for profit basis. Examples of private development funds include: The Old Mutual Masisizane fund is worth more R250m aimed specifically at women-owned and run small and micro- enterprises. The fund started from unclaimed de-mutualised shareholder money. The fund runs programs directly, but also lends money to small and micro enterprises identified by large corporations. 8 In the literature, the term reverse factoring (European term) and Supply Chain Finance (SCF) (United States of America) are often used interchangeably. Reverse factoring is a concept whereby the financier (a bank or factor company), instead of buying all the account receivables from all customers, only buys those account receivables from the high-quality customers of the SMME. With reverse factoring, the credit risk is equal to the default risk of the high-quality customer, and not the risky SMME. This arrangement allows creditors in developing countries to factor without recourse and provides low-risk loans to high-risk SMMEs (Klapper 2003). FinMark Trust: Supplier Chain Credit Report 21

22 Grofin South Africa is part of the Grofin Africa Fund. The fund describes itself as providing a unique combination of finance and business development assistance structured specifically to meet the needs of small and medium enterprises, and assist emerging businesses in the early stages where they do not necessarily have the track record or colateral. This fund is capitalised from the likes of AfDB, CDC, IFC, FMO, Norfund, EIB, FISEA BASA and the Shell foundation. Many of its applications are in the petrochemical and related industries. The Grofin Africa fund is worth US$170 milion of which the Empowerment through energy fund in South Africa account for R7 million. Thembanani International Guarantee Fund. Thembanani International Guarantee Fund is a fund specifically available to emerging black entrepreneurs. This fund originated from contributions from a number of persons who lived in exile in the US during the Apartheid years. Supply chain finance within the supply and value chain of a large business: The study identified various finance models where a big business finances SMMEs. As illustrated in the table below, supply chain finance plays a very important role as it is a source of funding available to a small business where it has no or limited collateral. 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. These models include business linkage initiatives that can help to increase economic opportunity by sourcing from, distributing through, or selling to small enterprises and farmers. According to Nelson (2008), initiatives like these have the potential to play a vital role not only in creating local jobs, improving livelihoods and enhancing economic options, but also in transferring skills, technologies, and sound business standards along value chains. She adds that surprisingly, these economic multipliers of large corporations have been one of the least analysed and reported aspects of corporate responsibility. In a South African context supply chain financing has gained significant momentum in recent years after the introduction of black economic empowerment (BEE) legislation. A direct result of this legislation was the establishment of enterprise development hubs in FinMark Trust: Supplier Chain Credit Report 22

23 most corporate institutions, many of whom created funds from which finance is granted to small black firms that are suppliers, clients or associates within the supply/value chain of the large business. In the South African context, supply chain credit seems to take different structures and formats, and each company interviewed had a different model with its own characteristics. However, all the supplier chain credit schemes identified seemed to have a Black Empowerment element. There is no question that there are a number of businesses that would not have been able to qualify for funding from a formal or DFI institution due to a limited track record and thus supply chain finance would be its only chance of getting off the ground. The research further found that supply chain finance in South Africa often interlinks with other sources of funding and support. There were instances where many large businesses who do not want to carry the burden and risks of a financier; identify a worthy candidate for finance and then partner with a company like Khula, or a bank to provide the finance. For example, SA Breweries has an owner driver scheme where it develops drivers to become owners via an extensive training and development program. Once a driver has been approved and accredited by SAB as an owner; the owner is required to sign a contract with SAB. Once all this is in place, a financier like Nissan has little objection to finance the driver. FinMark Trust: Supplier Chain Credit Report 23

24 CHAPTER 3: Supply Chain Finance in South Africa Information collected directly through interviews within the seven sectors included in the study as well as the literature review indicates that few companies are involved in supplier chain credit. In most cases, the credit is in the form of enterprise development loans, which is packaged with non-financial support, which includes incubator and/or mentoring; capacity building and training. The research has found that the credit is packaged differently amongst the companies and the following types of financial assistance were identified: BEE and start- up loans The major feature of these loans is that they are mainly targeted at African and women owned companies. The purposes of the loans included: Loan assistance geared towards transforming a white-owned business into a blackowned or black participation business. In these instances the equity stake of the new black business partner is financed. As is illustrated later in the report, Anglo Zimele, Barloworld and Mondi Zimele specifically finance BEE loans Illovo assisted black farmers in acquiring land. The results indicate that the BEE loans are in the form of unsecured term loans, with the interest linked to prime. Asset finance Asset finance is prominent within the agricultural sector. This is when the big businesses provide asset finance either for equipment, vehicles or farm implements to SMMEs. The results reveal that asset finance within supplier chain can happen in two ways: The first instance is when the big company provides the SMME with a unsecured loan that was utilised to buy equipment and farm implements or Indirectly where large company facilitates an SMME to acquire a loan and the financier like Wesbank provides the finance. The finance would not otherwise have been possible without a large business facilitating the deal. The presence of an owner-driver programme which involves mentoring and training and the prospect of preferential FinMark Trust: Supplier Chain Credit Report 24

25 procurement often results in a favourable interest rate for the emerging small entrepreneur. Procurement spending by a large business creates a steady income for the owner-driver and in so doing lowers the risk and reluctance of a bank to advance the money. Working capital/production loans Apart from asset finance, there are various examples where large businesses provide longer term working capital. The agricultural sector reflects numerous such examples which are elaborated upon below. Woolworths also advances finance for working capital purposes for new franchises. Factoring and reverse factoring Although factoring and reverse factoring as applied in the South African market was not researched in detail, it is evident from the large businesses interviewed that their enterprise development programs has alas, not investigated ways to proactively facilitate factor finance for the small businesses in their supply chain. Although it is common practice for small business to offer an invoice or tender as security in order to access a loan or overdraft, South African big businesses have not yet capitalised on the potential of factoring and reverse factoring in improving access to finance. Although referred to as direct lending and therefore not part of this study, the literature review revealed that South African banks have entered the supplier chain finance space. 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. The results indicate a need for a more structured tri-party relationship between formal financial institutions like banks and factor companies, large corporations and SMMEs that operate within the supply and value chain of a large business in order to facilitate and grow factor and reverse factor as another source of finance for a SMME. FinMark Trust: Supplier Chain Credit Report 25

26 FinMark Trust: Supplier Chain Credit Report 26

27 Chapter 4: Supply Chain Finance per Sector General agricultural sector About 70 institutions (see list of suppliers in Annexure C) in the agricultural industry provide credit to farmers and other users of agricultural products. These suppliers are mostly general agricultural co-operatives or co-operatives that converted to companies9 that supply agricultural products to the farming communities they serve. In addition to selling agricultural products, they provide trade credit, direct lending and other financial services such as crop insurance. AFGRI, SENWES, Vrystaat Kooperasie GWK Beperk and Suidwes Landbou are the largest agricultural companies in South Africa. These entities indicate that generally they would consider a small farmer to be one that has less than 400 hectares under production. A review of the profits of some of the largest co-operates and agricultural companies in South Africa indicates that finance to farmers, including trade credit, constitute between 10% and 20% of total profits. The main business activity revolves around selling agricultural production input products and later, a return on grain storing and selling. A review of the financial statements of the larger players and making assumptions about the smaller co-operatives it would appear that the finance book (both to small and large scale farmers) of agricultural companies in South Africa are in excess of R10 billion. SMME profile of farmers From discussions with co-operatives, it would appear that In excess of 80% of the customers of agricultural co-operatives are sole proprietors, partnerships or closed corporations. Although these legal forms may imply that the target market of agricultural organisations involve mostly smaller scale farmers, this is not the case. Co-operatives have many sole proprietors on their books with turnovers in excess of R50 million. A small farmer would be one that farms on 400 hectares or less. 9 For ease of reading this report refers to both agriculture companies and agricultural copoperatives as co-operatives, although it is acknowledged that some entities have evolved from cooperative status to private and public company forms. FinMark Trust: Supplier Chain Credit Report 27

28 Size of loan granted % of total debtors book in rand value R1- R % R R % R R % >R % Table 2: Senwes stratification of debtors book From table 2 above it is evident that the typical finance transaction of a co-operative is upwards of R1.2 million. From AFGRI, the largest agricultural company in South Africa it would appear that under 40% of their total book can be considered as a loan to a smaller farmer. Types of finance models in the agricultural sector Apart from trade credit, which constitutes a significant part of business, co-operatives offer various other finance products. Production loans: A crop production loan requires a once-off settlement as the harvest comes in; typically this is no later than 31 August (summer crops) and 31 January (winter crops) of the specific harvest year. Loans for the production of livestock are also on offer. This will entail finance for example animal feed or towards the establishment of grazing fields. In order to qualify for such a loan, the farmer would need to buy the bulk of his input products and services from the co-operative. Often these loans are secured indirectly with a requirement by the co-operative that the farmer must take out comprehensive harvest insurance. In such cases the insurance premium can also be financed by the co-operative. In other instances the co-operative will require security in form of an immovable or movable asset. Asset finance: Cooperatives provide vehicle and other farming equipment finance either directly or as is evident in some instances via joint venture with a vehicle and asset financier like Wesbank. Repayments are monthly with a finance term of between 2 and 5 years. The underlying vehicle or farm implement is the security for the finance transaction. FinMark Trust: Supplier Chain Credit Report 28

29 Mortgages: Mortgages are often for the purpose to finance the purchase of land or to consolidate a previous loan that the farmer obtained from a commercial bank or the Landbank. Loan terms of between 5 and 10 years appear to be the norm, although longer repayment terms are not uncommon. Short- term loans: Some co-operatives provide short- term loans to a farmer who has stored grain in a silo at the co-operative. Often grains are stored when there is an outlook of obtaining a better price for the grain at a future time. A short-term loan of typically between 3 to 6 months is then granted with the grain at the silo acting as the security Interest charged and sources of funding From the co-operatives interviewed it would appear that interest rates charged generally range between Prime -1% to prime +2% although rates of prime -2% are given to low risk clients and prime +5% for very high risk customers. On the whole it would appear that the typical finance rates are lower than interest rates on offer at the agricultural lending divisions of the major banks, at least as far as smaller higher risk clients are concerned. Non-listed agricultural companies and co-operatives perhaps have an advantage over the big banks in that it does not have the same onerous return on capital requirements of large banks and other listed entities and thus could finance at lower margins. This is because financing is not really their core business (the return on the finance operations is often subsidised by a higher return on product). It is important that this business model is preserved if only for the sake of continuing to provide relatively cheap access to finance for small scale farmers. However, as most would source capital from the major banks in order to provide finance, their cost of capital is high compared to that of the banks and they will always have thin margins on their financing activities. Other sources are equity capital, in the form of relatively expensive equity capital on the stock exchange (AFGRI) or otherwise over the counter in the case of non-listed companies. Many co-operatives under cooperative legislation were allowed to take deposits from farmers, which offer an additional source of funding. FinMark Trust: Supplier Chain Credit Report 29

30 The big advantage that agricultural companies have over banks is that it arguably can manage risk better, having various tools at their disposal to judge the risk of a loan given their knowledge of farming conditions in a specific area. So for example, they could make use of the knowledge of the agricultural experts at their disposal in a specific area, and take soil samples prior to granting a loan. AFGRI is the largest agricultural company in South Africa and the only one listed on the stock exchange. Their business model for financing has migrated substantially from the days when it was still a co-operative. At present it does very few deals with a value under R1 million purely because as a listed company their required return on equity favours pursuing very large finance transactions rather than many smaller loans. The cost of capital for a company like AFGRI is fairly high, coupled with the cost of legislative requirements and internal scorecard processing and the small loans become prohibitively expensive. Unfortunately, this means that a start-up and smaller scale farmers are unlikely to qualify for a loan as it does not offer a business case for the likes of an AFGRI. This discussion on cooperatives highlights important aspects of financing to small scale growers in the agricultural industry. Firstly, traditional co-operatives and those like AFGRI treat their finance divisions as a means to and end, and often are subsidized by other activities. Secondly these divisions cost of capital are fairly high, resulting in fairly thin margins, thus they are very cautious to extend loans to small and emerging farmers. This is especially true for the likes of an AFGRI and SENWES who has converted to companies and are subject to onerous return on capital requirements by shareholders. In conclusion: The agricultural sector has a high concentration of member based cooperatives that provide supplier credit to farmers. The cooperatives main focus is normally the supply of agricultural products, and provision of finance accounting for 20% of their profit. The finance book of these 70 cooperatives is estimated to be approximately R10 billion. What differentiates the member based cooperative model from the rest is that it not skewed towards BEE development, but instead assists individual farmers as per their specific needs. The financial products are developed based on the farmers specific needs and these results in efficient risk management and collection. Overall the results indicate that the agricultural sector has a well developed and structured model of supplier chain credit in South Africa. FinMark Trust: Supplier Chain Credit Report 30

31 4.2: Sugar agriculture According to the South African Sugar Association (SASA), the industry is responsible for generating an annual estimated average direct income of R7 billion. This constitutes R4.5 billion in value of sugar cane production. The sugar industry directly employs approximately jobs, which represent a significant percentage of the total agricultural workforce in South Africa. Indirect employment is estimated at In addition there are approximately registered cane growers. The South African sugar industry has a long history of promoting and supporting smallscale and emerging black farmers. These initiatives have been spearheaded by the larger sugar companies namely Illovo, Tongaat Hulett and TSB Sugar (Remgro). However, not all models were successful. Some initiatives involving land transfer to emerging black farmers have been unsuccessful due to insufficient management and mentoring and financial support to the new farmer to enable him to do a proper job of sugar cane production. In some instances farms were transferred to individuals who simply did not have the desire to become entrepreneurs and even small scale growers in their own right. Early funds in this industry focused largely on ensuring that emerging farmers are able to buy land. However these funds have proven to be less successful, with a land redistribution agenda partly to be blamed. Akwandze Agricultural Finance (Pty) Ltd is a newly established development fund from a partnership between TSB Sugar (Remgro) and the Ligugulethu Co-operative. It operates mostly in the Mpumulanga area and provides loans for Sugarcane establishment, ratoon management, irrigation infrastructure and electricity loans. Close to 900 small scale cane farmers bought shares in the Ligugulethu co-operative, which TSB matched in order to create the fund from which loans are made. The original fund size was R25m. However in order to meet demand, Akwandze realized it required further capital and late in 2009 established a new fund where Akwandze contributed R25m and Khula disbursed a further R75 million. FinMark Trust: Supplier Chain Credit Report 31

32 Features of an Akwandze loan: Interest rates charged by the Akwandze funds range from 12.5% if borrower is a member of the Ligugulethu Co-operative and 14.5% for non-members. These loans are unsecured as small scale farmers cannot, for example, cede land as security, as they would often farm on tribal land which does not provide title ownership to the small scale farmer. Akwandze does not require harvest insurance as a prerequisite for granting the loan. Rather it is recovered from proceeds when the cane is delivered to the sugar mill. Illovo Sugar has a policy to not offer any direct finance to small businesses. However they have extensive programs that facilitate indirect finance to small cane growers within their supply chain. Illovo took a strategic decision a number of years ago to set up a division which on a full time basis mentors and monitors emerging black farmers to which sugarcane fields where transferred as part of early black economic empowerment initiatives. They have and are currently assisting them in three ways: Facilitating access to finance from the likes of the Landbank and Ithala Bank. Illovo has put measures in place to ensure a high repayment rate of these loans, without supplying a formal guarantee. This way many black farmers have built up a sound track record with banks and have now qualified independently for additional finance. Fast payment of invoices when cane is delivered to the weigh bridges at Illovo sugar mills. Instead of the usual days to pay for cane delivered to the mill, Illovo pays within less than 30 days. Providing guarantees to fertilizer companies on fertilizer spend by small growers. At present Illovo guarantees fertiliser spend of its small scale growers of about R20 million. Illovo is proud of the fact that 95% of land transferred to black owners many years ago as part of BBBEE initiatives are stil operational and this is due to their hands on mentoring and financial supporting role. Of the original 68 farms that were transferred, 53 owners are now in place after some of the more successful farmers bought out smaller farmers. FinMark Trust: Supplier Chain Credit Report 32

33 In conclusion: The results indicate relatively low activity of supplier chain credit within the sugar agricultural industry. Instead most organizations in this industry seem to prefer the indirect finance model, where the organization indirectly assists the sugar farmer to access finance. The assistance may be in the form of quick payment of invoices and providing guarantees so that farmers build a good track record. These forms of assistance guarantees farmers a good chance of qualifying for the loans with their banks. The research identified only one cooperative that provides supplier chain to farmers, but this cooperative only operates in Mpumalanga. Sugar companies interviewed mentions that there are numerous lessons to be learned from various grant and finance programs in the industry over the past decade. Firstly, there was a high failure rate where sugar cane land was redistributed to communities when land redistribution legislation was implemented a few years back. The communities that took over the land were simply not equipped to maintain cane production and earn a living off the land. The success of these programs can significantly be enhanced if government were to partner with sugar companies who have the skills, experience and resources to mentor and monitor the new land-owners. Thus when government transfers land that is suitable for sugar cane growing, they should fund a mentoring scheme run by the sugar companies. FinMark Trust: Supplier Chain Credit Report 33

34 4.3: The Retail sector The retail sector provides some examples of financial assistance to small businesses in the supply chain. Generally, these retailers support small business development, especially black-owned enterprises, by means of preferential procurement schemes, and by supporting and providing finance to emerging suppliers of goods and services to the retailer. Indirect finance is provided to suppliers by, for instance, shortening the repayment period of invoices, and/or reducing the working capital requirements of the small business supplier. Downstream of the supply chain, they also offer franchise opportunities, often with financial assistance. Woolworths embarked upon an Enterprise Development (ED) strategy two and a half years ago as part of its black economic empowerment initiatives. The ED division looks for development opportunities from among suppliers of goods in their core trading areas (food, clothing and home ware), support services in their supply chain and lastly in assisting franchisees. In its annual sustainability report of 2009, Woolworths states that in terms of its Enterprise Development (ED) strategy, its aims are to address the challenges facing small black-owned businesses by assisting these businesses in moving from survivalist to sustainable. Woolworths supports its black-owned suppliers via: Preferential procurement, shorter invoice payment cycles, and by providing loans and equity capital to a lesser extent. Downstream, the enterprise development division also assists black-owned franchisees with start-up or expansion loans. The Woolworths group further assists these franchisees by way of allowing longer repayment on stock purchased from Woolworths. Loan funds are made available on a needs basis to enterprise development partners. Over the past two and half years Woolworths has assisted over 40 beneficiaries. Currently about 8 small businesses utilise loans from a book of approximately R15 million. Woolworths have mentioned that it has plans to grow this book significantly over the medium to long term. The enterprise development division sources its loan capital from the group, but also fromold Mutual s Masisizane Fund. FinMark Trust: Supplier Chain Credit Report 34

35 Characteristics of Woolworth s loans: Woolworths structures their loans uniquely to fit that of the requirements and business model of the user. Loan size varies significantly but is typically between R and R 2 million with repayment terms varying depending on the business model and circumstances. Loan terms range between 3 months and 5 years. Interest rates are below prime. Other requirements and interventions o The beneficiary must operate within the Woolworths supply chain. o Although it has not done so yet, Woolworths would consider taking and equity interest in the SMME business. o Woolworths assists small businesses with skills and business development programmes and where necessary via the use of third party skills development providers to assist small businesses Shoprite will assist suppliers with a bridging loan if they have cash-flow problems but that is not a norm within Shoprite. They prefer not to get directly involved with financing but rather focus on indirect mechanism to support small businesses in their supply chain. Shoprite has three enterprise developmentinitiatives, namely, The Greenfield s project which is part of Shoprite s fruit and vegetable procurement arm and aims to uplift emerging BEE suppliers. Nyama Nyama Emnandi assists emerging livestock farmers. These initiatives involve extensive mentorship schemes, financial training and support and especialy for the Greenfield s project Shoprite has provided essential local and international distribution linkages. Indirect finance is provided in the following areas: Shoprite has a policy to pay emerging small businesses within 7-14 days of delivering goods. (The usual cycle is 30 days and more) In terms of its franchise stores it provides the start-up stock for a new shop, the repayment on the stock will be interest free. It costs about R5 million to set up a small franchise store. Where a potential franchise owner does not have sufficient capital, Shoprite facilitates finance via a partnership with Khula. FinMark Trust: Supplier Chain Credit Report 35

36 Discussions with Shoprite also revealed that they take on 1000 interns in their shops every year, in various positions in a store including bakers and butchers. Usually they employ more than 90% of these interns. These interns are ideally suited to start their own bakeries and butcheries; however Shoprite does not provide finance for these interns to start their own businesses. Pick n Pay highlights enterprise development and preferential procurement from blackowned and black female-owned enterprises as two of their seven pillars of codes of good practice. Pick n Pay has a dedicated enterprise development fund, the Ackerman Pick and Pay Foundation fund earmarked for funding BEE initiatives. A review of the sustainability report seems to indicate that Pick and Pay provide indirect finance to small businesses in their supply chain. Unfortunately we were unable to ascertain the extent of this assistance. In conclusion: The retail sector has few incidences of direct supplier chain credit and various examples of indirect financing. The few cases of supplier chain credit in this sector were in the form of unsecured loans and structured to fit the SMME s needs. These loans were positioned as enterprise development funding, which is packaged together with training and capacity development. Indirectly, the retail sector also utilises the franchise model to assist black owned franchises; this in the form of start-up capital, or funding that enables the SMME to purchase the start-up stock at zero interest. The internship training at Shoprite highlights an important need for start-up finance for candidates who successfully complete the internship. This emphasises the point that sector specific RFI funds under organisations like Khula can add significant value in improving access to finance to small businesses e.g. the Shoprite model where a person may want to open a butchery after completing the internship. FinMark Trust: Supplier Chain Credit Report 36

37 4.4: Food and Beverages Sector SAB Limited (SAB) (South Africa) SAB is the second largest listed company on the JSE Securities Exchange, and a leading manufacturer and distributor of alcoholic and non-alcoholic beverages. Amalgamated Beverage Industries (ABI) is a subsidiary that dominates the soft drinks market in South Africa. As well as its beer and soft drink operations, SAB also owns hops and barley production companies. In terms of its South African operations, SAB employs more than 9,000 people, and support an estimated 48,000 jobs at SAB s first round suppliers. For each job offered by SAB and its first round suppliers, 5.7 additional jobs are supported in the rest of the South African economy. In all 378,000 full time jobs in South Africa can directly or indirectly be traced back to the production of SAB s products. SAB have the following enterprise development programs. Preferential procurement from BBBEE compliant companies which totalled R6, 5bn in 2008 from more than 5000 suppliers. Owner driver schemes (SAB and ABI) Barley, hops farming Mahlasedi Taverners Training program SAB Kick-start which supplies grant funding and training to young entrepreneurs to set up a businesses. Given the magnitude of the extensive supply and value chain network of SAB, it is surprising that the company does not have any fund from which it directly finance small businesses in their supply chain. However, SAB has an extensive enterprise development program (See Annexure C) which, although it does not provide direct finance, assists small business indirectly to access finance in the following manner: In Its owner-driver scheme - the beneficiary must pass a rigorous screening process, including psychometric tests and basic education requirements. Once selected, they first have to complete a development phase as well as a 12- month programme of training, mentoring and evaluation before they can become long-term contractors who qualify to receive finance to procure their own vehicle. FinMark Trust: Supplier Chain Credit Report 37

38 In addition, drivers must register as a legal entity e.g. a closed corporation. In the Taverners training program SAB encourage unlicensed shebeen (bar or tavern) owners to acquire licences, business skills and sell liquor responsibly. More than 12,000 Taverners have been trained, and many have reported impressive and sustainable improvements in their business. In conclusion: The research found that direct supplier chain credit in the beverage sector is almost non-existent. Similar to others like Illovo and Shoprite, the beverage companies prefer the indirect finance model, which is characterised by capacitating SMMEs so that they become ideal candidates when applying for finance at a formal finance house. This includes training; mentoring and assisting SMMEs to become compliant in terms of acquiring licences and registering companies. The capacity building normally occurs at enterprise development level, and is mainly targeted towards BEE individuals. With preferential procurement schemes, beverage companies ensure more certainty in the working capital funding needs of the SMME. This paves the way for access to finance from a formal institution. For example an owner driver that came through the SAB scheme, is able to access finance from Nissan and Daimler Chrysler at a preferential rate. FinMark Trust: Supplier Chain Credit Report 38

39 4.5: Petrochemical Sector Enterprise development activities in the Petrochemical Industry are co-ordinated by a sector specific development agency called the South African Supplier Development Agency (SASDA). This is a not for profit company reporting to the Department of Minerals and Energy. SASDA does enterprise development (technical, mentorship and preferential procurement programs) without providing direct finance. However, within the industry large petrochemical companies do have funds from which loans are granted in conjunction with enterprise development programs. The following funds are worth a mention: Sasol chose to implement large-scale BEE by means of share ownership schemes rather than focus on enterprise development. However, it has two small business development initiatives. The first is ChemCity, which is a grant-based based incubator enterprise support system without financial support. The other is the Siyakha Trust, which provides loan funding to SMMEs that operate in the Sasol Supply Chain. The Shell Foundation, together with ABSA and the IDC contributes to a sub fund called the Empowerment through Energy Fund (part of Grofin) that is worth approximately R50m. Like the other Grofin funds, this fund is specifically positioned as a financial partner for SMEs in the petrochemical industry. This fund is dedicated to small and medium enterprise finance. The activities of other petro-chemical companies like Total SA and BP were also reviewed, and although they have extensive enterprise development programs, it appears that these two companies do not supply direct finance to SMMEs within their supply chain. Some evidence was found where BP partnered with the like of Women s Development Business and the Mining Investment Corporation in order to facilitate finance. However, it must be noted that petrol service station franchise arrangements have not been explored in detail in this study. It may well be that as part of the franchise packages; they provide direct finance or indirectly facilitate opportunities to access finance. It is recommended that this is explored in more detail in future research. FinMark Trust: Supplier Chain Credit Report 39

40 4.6: The Office Automation Sector Original Equipment Manufacturers (OEMs) like HP and Nashua appoint a number of distributors or resellers to sell and service their equipment. Typically, an OEM would only sell directly to very large end users. Companies like HP and Nashua have finance divisions that finance large deals (typically in excess of R1m) to large end users only. An Interview with HP Finance confirmed that they have no finance schemes available to small businesses. This is primarily because they do not engage with smaller businesses as they do not want to compete with their resellers. In addition we have established from HP that although they have programs in place to develop emerging black resellers, this involves technical assistance and extensive business training, it does not include any form of supply chain finance. In terms of the smaller end of the market, small businesses would often acquire basic office equipment at a retail store like Game, Dion or Incredible Connection. In this case it could be cash or store card transaction. Or, alternatively, approach an OEM reseller. It would appear that close to 80% of deals with resellers are rental agreements between a small business and a dealer. Most companies prefer going the rental route as it does not require the full outlay upfront and gives them flexibility to upgrade to new technology after a few years. However, for those small businesses who would want to buy outright and who would like to obtain finance the reseller would typically approach specialist finance houses like Sasfin or CGS for finance quotes. A dealer interviewed indicated that, he would consider financing the small business himself if the finance houses approached denied credit. Conclusions: Small businesses typically prefer to go the rental route thus direct finance of office equipment is not a pressing need. If a small business does want to obtain finance for an outright buy there are finance options available from specialist finance houses like Sasfin or asset finance divisions of banks. Thus in this sector, supply chain credit where a big business supports a small businesses within its supply of value chain is not clearly evident. Although not investigated in detail, it would appear that finance from specialist finance houses can prove to be expensive and it is recommended that some dialogue is started between OEM s and the likes of Khula to establish a fund that reselers could approach when wanting to provide finance for small businesses that approach them for credit. FinMark Trust: Supplier Chain Credit Report 40

41 4.7: The Telecommunication Sector The cell phone industry is dominated by three major companies i.e. Cell C, Vodacom and MTN. Upon close scrutiny the research indicates that there is no incidence of supplier credit. These companies are extensively involved with enterprise development that includes HIV aids, Education, Infrastructure development and environmental awareness. Like other major South African companies BEE is executed through the franchising of cell phone shops. With Vodacom, the SMME is expected to have a minimum cash requirement of R to set up a shop that is typically leased for 5 years. Discussions with Vodacom confirm that the company does not offer direct finance to SMMEs, but instead have a partnership with Khula to assist SMMEs that require finance. Thus, an SMME has the option of approaching a DFI or a bank to provide a loan. CellC has two franchise models, that is, the CellC Connect and the CellC Mobile shops. The CellC Connect franchise will cost an SMME R to access. This includes a laptop, promotional material, and order book and training on how to sign up Cell C customers. The SMME is expected to pay the R cash and CellC offers no direct financial assistance in this regard. Conclusion: The cell phone industry has no evidence of direct finance by the cell phone companies to their franchisees. SMMEs only option is a loan from family pr friend, or formal financial houses in order to be come a role player in the supply chain of the cell phone company. Vodacom has an agreement with Khula., who assist SMMEs who have been pre-approved by the company. It is recommended that other cellphone companies like CellC, follow this example, and establish relationships with DFIs like Khula to ensure easier access to credit for SMMEs that operate in their supply chain. FinMark Trust: Supplier Chain Credit Report 41

42 4.8: Mining sector There are a few examples in the mining industry in South Africa in which a big business supplies financial products to small businesses in their supply chain. As with many recent examples in South Africa of SMME finance, this assistance is provided as part of the broader aim of black economic empowerment via enterprise development throughout their supply chain. ANGLO ZIMELE ("to be independent" or "to stand on one's own feet") is the Anglo American Group's enterprise development fund, established 20 years ago to empower black entrepreneurs through the creation and transformation of small and medium enterprises (SMEs). Since its inception in 1989 it has invested more than R300 million in 509 small businesses which collectively employ close to people. It invests in numerous SMEs across various industries throughout its supply chain, and provides loan and equity finance via three funding vehicles. The funding criteria for each of the Anglo Zimele finance products are discussed below. However, generally, Anglo considers long-term commercial sustainability, skills transfer and BEE, and that owners of the companies must be involved in the day-to-day management of operations as key criteria before providing equity or loan funding. Furthermore, the business must be registered as a private company (Pty Ltd) and as such must have an appointed auditor and maintain proper accounting records. Anglo Zimele s enterprise development model is very flexible and adjustable to particular circumstances, and as such should not be viewed as a one size fits al approach. Furthermore, it requires an extensive support network as well as people with a passion for innovation, development and transformation Godfrey Gomwe, Chairman Anglo Zimele, May The Small Business Start-up Fund was founded in 2007 and provides loans of up to R1m to small businesses and entrepreneurs in communities within which Anglo American companies operate. Since inception, it has provided loans to a value of R52m (as at June 2009) for enterprises that employ approximately people and that have a collective turnover of more than R80m. FinMark Trust: Supplier Chain Credit Report 42

43 Start-up fund loan characteristics: Loan values of up to R1m Interest rates of around 10% The beneficiary must operate within a 50km radius of an Anglo American business unit and must comply with BEE criteria as per the Mining Charter. The beneficiary needs not be part of the Anglo American supply chain. Anglo Zimele supports small businesses via 11 small business hubs across SA. These walk-in centres provide local, aspiring entrepreneurs with tangible support including business planning, training, mentoring, and basic business and accounting advice. The hubs also offer access to administrative facilities such as fax machines, printers, scanners, Internet and meeting facilities. The Supply Chain Fund is an extension of the Anglo American Group s procurement department that focuses on channelling business opportunities to black empowered SMEs through equity and loan finance. In the 1980 s Anglo American realised that they were underpinned by a large network of small businesses that produce components for a final product or process. Examples include design and manufacturing of under-ground mining equipment, repair and maintenance of earthmoving buckets, corrosion protection, safety and support services, civil engineering and rubber recycling. Supply Chain Fund loan characteristics are: Loan values of up to R5m. Interest rates of prime plus 1%, and in some instances the debtors book is used as security An existing or potential link to the Anglo American supply chain must be operational. Anglo Zimele acquires minority equity participation of between 10% and 49% of the company funded by the Supply Chain Fund. The Anglo Khula Mining Fund is a joint venture between Anglo American and Khula Enterprise Finance limited. The fund assists emerging black-owned mining companies with equity and loan finance. It also provides technical support during the high-risk exploration and pre-feasibility phase. Loan values of up to R20m Interest rate at prime. The beneficiary must operate within the Anglo American supply chain. FinMark Trust: Supplier Chain Credit Report 43

44 Box 3 Anglo Zimele acquires minority equity participation of between 10% and 49% of the company funded by the Anglo Khula Mining Fund. Case studies from the Anglo Zimele Small Business Start-up Fund: Vukani Musa Construction- Sishen Joseph Kente, founder of Vukani Musa Construction obtained a R loan from the Small Business Fund to get his business off the ground in April He, amongst other projects, is upgrading various buildings in the Sishen area including the construction of a pre-primary school. *Willem Smit and Jospeh Kente, partners in Vukani Musa Construction. Medical Practice Dr. Lorna Maphuthuma received a loan from the Small Business Start-up Fund that enables her to buy a medical practice in Burgersfort. The practice is a preferred service provider to the Anglo Platinum Health Scheme. Reditsego Transport Sybo Ditsego worked for a laboratory that tests coal samples. When the transport company that delivered the samples became unreliable, Sybo took over the role himself after obtaining a loan from the Zimele start-up fund to purchase two vehicles, set up office and buy protective equipment. He employs a driver and two general workers. FinMark Trust: Supplier Chain Credit Report 44

45 In conclusion: The literature review indicates that the mining industry has been active in supplier chain credit for almost 20 years. Mining companies have well established funds and the financial assistance is BEE focused. Most of the products are segmented according to the purpose of the loan and includes: Loans for geological exploration Start-up finance Asset finance The financial assistance is not only targeted to SMMEs within the mining supply chain, but also includes entrepreneurs who service the communities in the vicinity of the mining activity. FinMark Trust: Supplier Chain Credit Report 45

46 4.9: Forestry and related industries Cultivating and harvesting forests and providing related services including fire protection or labour transport is a very capital intensive business. Businesses generally operate in rural areas and in difficult operating circumstances. A small and medium enterprise in this sector could employ from 10 to 100 people and can have a turnover of up to R100m. Due to the capital intensive nature of operations; margins are very small making this a very high risk environment to operate in. Mondi Zimele followed in the footsteps of Anglo Zimele in 2007, with a very similar drive of black economic empowerment and enterprise development through-out their supply chain. Mondi Zimele adds value through making available equity, loans and business development support to high-potential prospects and companies within the Mondi value chain. Forestry finance. Mondi Zimele seeks to support enterprises providing services to the Mondi forestry value chain. These businesses are largely centred in the rural areas of Mpumalanga, Northern KwaZulu-Natal and the KwaZulu-Natal Midlands. Examples of past SMME developments have been in the areas of harvesting, silviculture, forestry transport and fire protection. Supply chain finance: Mondi Zimele supports businesses that provide products and services to the various mills and operations of Mondi throughout South Africa. Examples of past SMME finance in this regard have been in the areas of transport, industrial contracting and services, pallet manufacturing and training. Small Business Start-up: This is a new focus area, which aims to provide small loan finance to viable SMME companies within Mondi's areas of operations, but not necessarily within the Mondi value chain. The specific focus is on women and youth development through the establishment of small enterprises in rural communities. Since inception in 2007, Mondi Zimele has invested about R35m (out of a total available fund of R70m) in the establishment of fourteen separate empowered small enterprises. These businesses had a collective turnover of over R200m, employing some 1600 people. FinMark Trust: Supplier Chain Credit Report 46

47 Key facts about the Mondi Zimele finance programs: Book size: R35 million disbursed from available fund of R70m Source of capital: Non-interest bearing loan from Mondi South Africa. Lending rate: Mostly prime-1% or prime, in exceptional circumstances prime -2%. Other requirements: Mondi Zimele appraises all prospective projects for three main criteria. Entrepreneurial viability, business viability and empowerment potential. Mondi Zimele always takes a minority equity stake of ranging from 10%-49% (typically 20%) in the small business it finances. Mondi supplies a company secretary and business development manager who sits in on all board meetings. The business development manager is the backbone of Mondi Zimele s assistance programme. This person facilitates relationships and marketing opportunities within the Mondi Zimele Group including securing preferential procurement arrangements. Mondi Zimele s main objective is to exit its investment in about 3-5 years so that the company can function independently. Box 4 Case studies from Mondi Zimele Thuthuka Forestry Thuthuka Forestry, is a siviculture Company contracted to Mondi in its Mpumalanga forestry operations. Thuthuka Forestry employs over 500 people and operates in an area of over Ha. In 2008, in a significant BEE deal, Mondi Zimele financed the FinMark Trust: Supplier Chain Credit Report 47

48 management buy out of the company by four of its BEE employees. All the new partners had previously been actively involved in the day to day operations of the business and were pleased to have an opportunity to participate in the ownership of the company. This transaction was made possible through the provision of unsecured loans for the acquisition of the business in an environment where access to finance remains a major stumbling block for emerging black entrepreneurs in South Africa. Despite some initial implementation challenges, the company is now fully transformed, the team has grown significantly and turnover has increased by over 50%. All initial loans are being paid in advance. They have recently applied for further loans from Mondi Zimele for the acquisition of additional equipment and seem well set to continue their ongoing success. Khulanathi Forestry Khulanathi is a black empowered timber procurement and logistics business originating from the Mondi woodlot growers program for rural communities. Khulanathi purchases timber from small growers in Northern Kwa-Zulu Natal for supply to Mondi. Khulanathi employs eight full time staff and purchases timber from over 3000 small growers in the province. Khulanathi began operations in 2007 on the back of support funding from Mondi Zimele. The three BEE partners in the business are from the area and have significant experience in the local timber industry. Khulanathi is now well established owning four weighbridges strategically situated in rural community areas where growers are able to bring their timber for sale. Khulanathi works closely with the growers and provides a critical service to enable access for small rural growers to the established mill markets. In addition, with help from Mondi, Khulanathi provide free seedlings and forestry support to growers for the reestablishment of their woodlots. FinMark Trust: Supplier Chain Credit Report 48

49 4.10: Building and construction As is evidenced from Table 1, small businesses contribute more than a third of turnover of the construction sector. Unfortunately, small building and construction businesses that buy from building suppliers cannot access long term credit. Instead, these entities offer 30 day payment terms only. Building suppliers mentioned that they were reluctant to grant credit as the building industry is notorious for late delivery and poor workmanship which leads to non payment. Nevertheless, not all builders fall into this category and there should be mechanisms in place, including access to finance for deserving contractors. A building retailer interviewed mentioned that, on numerous occasions it has been approached by small contractors who have won fairly large tenders to build for example low cost housing units and who wanted credit. However, they could not afford the risk of giving the credit, as they were concerned about the delayed payments by the government to contractors. As they pointed out, access to finance for these contractors is limited as: They often do not have a personal or business bank account and a financial history that will satisfy a large bank to give them a loan. Applying to developmental organizations like Khula is time consuming. By the time a decision is made on the application, they had to relinquish the tender. Although most building retailers do not give any finance (other than trade credit) they encourage small business activity on their premises. For example, Builders Warehouse assists micro-entrepreneurs to run Hot dog carts and vending machines from their premises. Cashbuild makes rent free space available for glass cutters to operate glass cutting businesses and allows brick makers to advertise their products. In addition, Cashbuild makes use of small business for some of their deliveries, although they would not finance them directly. Builders Warehouse further have arrangements whereupon it will pay some its suppliers upon receipt of invoice, thus indirectly assisting with working capital finance of the supplier. In conclusion: The construction sector has a high number of black SMMEs participating through the government s infrastructure development program. This includes building of RDP houses, road and building construction. These are capital intense projects, which need substantial start-up funding. Regrettably, the findings point out that construction retailers do not offer supplier chain credit and the only solution available to SMMEs is trade finance directly with the retailers or indirectly through RFIs. As discussed in the FinMark Trust: Supplier Chain Credit Report 49

50 recommendations section, it is important that some of the obstacles that prohibit small scale contactors form sourcing finance are addressed. 4.11: Other Sectors The desktop research unveiled the following examples of finance in the supply chain that are worth a mention. It must be noted that the sectors in which these companies operate have not been explored in detail, thus we would like to caution that these are indicative of the activities of the individual companies only and not necessarily the sectors in which they operate. Transport and Logistics: Barloworld operates an enterprise development fund called Barloworld Siyakhula which provides loans and non-financial assistance to small businesses both upstream (suppliers) and shareholders and downstream, (distributors and customers). It operates a fund of about R35 million from which it supports businesses. From this fund loans are given and grants disbursed to capacitate and develop an enterprise. Barloworld has a particular focus on transformation finance, thus providing finance to a black person to acquire a stake in a white-owned business. Telecommunication: Nashua Mobile operates about 150 franchises of which 42 are black or partially black owned after they commenced with and enterprise development program in Nashua mobile gives financial support to these franchises in terms of rental, shop fitting and ad hoc miscellaneous items. In a typical franchise agreement, Nashua Mobile will provide 50% of the total funding required to set up the franchise. The franchisee has to fund the other 50%. Direct finance and the provision of stock and shopfittings are granted on an interest free basis. In conclusion: There is anecdotal evidence from this research that supplier chain credit is available in these sectors. This is mainly through BEE loans and quasi-venture capital. FinMark Trust: Supplier Chain Credit Report 50

51 Chapter 5: Lessons learnt Entrepreneurial flair and business skills first, before granting finance: Most SMME experts believe that as insofar as overall support to SMMEs is concerned, finance is in actual fact not the most important component to guarantee success of the small business but rather entrepreneurial fair and adequate training. These experts agree that SMMEs with entrepreneurial flair are able to sustain and grow their businesses. According to the experts, no amount of finance and technical assistance can make up where the SMME is not well trained and does not have the entrepreneurial flair. Mondi Zimele adds a cautionary note: - Entrepreneurial qualities of key persons wanting to start the business are very important in addition to finding the correct skills and experience mix. In some instances our programme over-supported businesses or nursed the small business too much. Only too late was it realised that the key parties where not as enthusiastic about the business and that as a funding and development partner we should have withdrawn earlier Review of the Anglo Zimele supply chain fund model as documents by the IFC (2007) highlights the following success factors: Flexibility The model is not rigid i.e. debt-equity ratios are flexible and can be designed to suit the investment. Equity stake by fund. The fact that the investment fund takes the risk of taking an equity stake in the SME is a major departure from the traditional approaches adopted in the past, creating an incentive for the fund to take more interest in the day-to-day operations of companies it invests in. Unsecured loans. The model provides flexible financing mechanisms for the SMEs in the form of unsecured loans, when deemed appropriate. It is unrealistic to require security as small businesses are unable to provide this. Co-sharing of risks. By encouraging the entrepreneur to have a stake in the company, risks are co-shared. Hand-holding/incubator approach. An integral part of the model is provision of business development support and transfer of technical skills. FinMark Trust: Supplier Chain Credit Report 51

52 Conclusions In South Africa, where most SMMEs experience difficulties when accessing finance, supply chain finance seems to be an excellent mechanisms to improve access to finance for SMMEs due to the following reasons: 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. If the finance beneficiary is a supplier of the large business, the certainty of loan repayment is high as the large business will firstly sign the SMME as a preferential procurement partner and secondly will fast track invoice payment to the SMME. In many instances the small supplier does not have to provide up-front collateral for the loan. Indirect collateral manifests when the small supplier delivers the goods and the large business then first deducts a loan instalment as part settlement of an invoice. Although this may not be sustainable over the long term, these loans are granted at relatively inexpensive rates which are under, or in the region of, the prime lending rate. Commercial banks are unlikely to grant loans at less than prime plus 2% to SMME and start-up businesses. 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. The results identified that the agricultural sector has many successful models of small business finance that can be utilized as benchmarks: The general agriculture sector has for many years provided access to finance for small and big farmers alike. Thus finance products are as sophisticated as can be seen in the formal financial market. However financing of especially emerging black entrepreneurs can be expanded significantly. Ways to access cheaper sources of capital is paramount to ensure continued support of small scale farmers. In the sugar agriculture sector there are advanced enterprise development finance models. This after sugar companies tried and applied various finance models, some of which have failed. The sugar industry highlights the importance of close management, mentoring and other technical assistance that should go hand in hand with any finance deal to an emerging entrepreneur. FinMark Trust: Supplier Chain Credit Report 52

53 There is a gap in financing of building and construction material for small scale contractors: The study found that the likes of Builders Warehouse and Cashbuild, only offer limited trade credit to small-scale contractors. Unfortunately, emerging entrepreneurs have little chance to capitalise on large tenders won (especially from government) as they are unable to start and complete projects without proper finance. As indicated by another FinMark Trust study undertaken by Vulindlela and KRB Law (2009) there is a ban on cessions of accounts receivable for government contracts which means SMMEs can not use this as collateral to apply for finance. However, the research established that supply chain credit seem not to take off because of: Fragmentation of DFIs efforts: Development Financial Institutions appear to be uncoordinated in their efforts to improve access of credit to SMMEs. It is recommended that the government look at the option of establishing sector specific RFI (Retail Financial Intermediaries), to increase awareness and provide sector specific products, not the one size fits al model that is curently implemented. Financial Literacy Issues: The research unearthed several credit options that SMMEs can access. The issue though is that most SMMEs operate at survival mode, and have little time to capacitate themselves and look for information. SMMEs should be encouraged to always be looking for alternatives and information; else all these efforts will reach only a handful of enlightened SMMEs. FinMark Trust: Supplier Chain Credit Report 53

54 Recommendations Explore the development of sector specific RFIs or funding/learn from the agricultural sector: The member based cooperative model in the agricultural sector has developed significantly in South Africa. It is estimated that the finance book by the approximately 70 agric cooperatives in South Africa is in excess of R10 billion (to both small and larger scale farmers). This has shown that sectors specific finance has an important role to play to improve access to finance. Firstly, a sector specific fund has access to detail business and production conditions, thus are better able to judge risks associated with a loan. Secondly, as repayment of a loan is linked to the delivery of goods by the small business to a large business, loan repayment is first collected before the invoice of the small business is paid. The added benefit of a member based co-operative is that finance charges could be less than what a formal business would otherwise offer an SMME. There is potentially a lot of value in establishing sector specific RFI s. For example in setting up a beverage industry fund that the likes of an SA Breweries can access to disburse funds to SMMEs that operate in their value chain. Encourage and establish tri-partite linkages between SMMEs, large corporations, and financiers: Although this study did not aim to do an in depth study of invoice factoring, one of the main conclusions is that in terms of SMME finance this appears to be an under-developed source of funding. Now that South Africa has a growing supply chain finance industry where large businesses are actively supporting small businesses within their supply chain, a natural progression would be that from these relationships invoice factoring develops. This means that the likes of a SA Breweries should collaborate with a formal financial institution or RFI so that the SMME can benefit from a factor product of the formal financial institution linked to an invoice submitted to SAB. Strengthen Capacity Building Interventions for SMMEs, before granting finance: Every single fund and 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. FinMark Trust: Supplier Chain Credit Report 54

55 FinMark Trust: Supplier Chain Credit Report 55

56 References General References 1. Feinberg, Susan, Research Director, Wholesale Banking, Tower Group (July 2007). So you think you understand supply chain finance? Article on FX-MM.com. 2. Klapper, L. The Role of Reverse Factoring in Supplier Financing of Smal and Medium Sized Enterprises, Development Research Group, The World Bank. 3. Steinhart, Lisa. Articlefeeder.com, November Article: the Wal-Mart Supplier Alliance Program is great for Wal-mart and Suppliers Alike. 4. The National Treasury: The Vision of Financial Inclusion, March GEMS Report FinsScope Small Business Survey: Gauteng 2006The Centre for Competitive Credit at the Political & Economic Research Council. Information sharing and SMME Financing in South Africa, A survey of the Landscape Vulindlela,KRB Law; Investigation into Collateral options for lending to micro and small enterprises, Download from 9. WorldBank, enterprise surveys. Corporate publications: Information was sourced from the Sustainability Reports of the following companies: 1. SAB Limited (2009,2008), SABMiller (2009), SABMiller Enterprise Development Report (2008) 2. Shoprite (2008, 2009) 3. Pick n Pay ( ) 4. Woolworths (2009) 5. Anglo American (2008), Various Brochures from Anglo Zimele 6. MassMart (2009) Sasol (2008) Barloworld (2009) Information were sourced from website publications of the following companies 1. All the companies mentioned under the sustainability report section above 2. Grofin 3. Masisizane, Old Mutual 4. Banking Association of South Africa ( Debtor financing Committee) 5. Khula Enterprise FinMark Trust: Supplier Chain Credit Report 56

57 Annexure A: The Niche Case Study Store to home online ELO business Mr. Deon Leminie is a 30-something year old man, who owns a store-home delivery business called Niche. People order Woolworths food on-line, after which Niche receives the order from the Woolworths website. A Niche driver is then dispatched to collect the order at the nearest Woolworths store, and then delivere it to the home. Business details: The major clients: How many employees Estimated turnover Woolworths 32 employees countrywide R4.9 million Supplier chain finance Who provided you with finance? Woolworths How much was the loan? R Purpose of the loan To buy a vehicle and some office equipment Interest rate charges Prime -2 Terms of the loan Loan requirements How loan money was received A repayment is R7, 000 per month for 36 months. No collateral was needed from Mr. Leminie. Directly into SMME account What other support did you receive from Woolworths Short courses Woolworths installed an invoice system and provided training on how to utilise the system Woolworths helped me a lot. I employ more people now, and my business is growing. They do not only help me financially, by they also send me on short courses the information of which I use in my company. They have given me an invoice system free of charge, and they also trained me on how to use it. I have 32 drivers all over the country, and I am steadily growing. Deon Leminie, owner of Niche. FinMark Trust: Supplier Chain Credit Report 57

58 Annexure B: The Ubuntu Case Study Ubuntu was formed by a group of five cooperatives of local women from Plettenburg Bay. The women manufacture linen and home ware and supply it to major retailers like Woolworths and International Trims and Labels. Most of the women are from previously disadvantaged communities. Business details: The major clients: How many employees Estimated turnover Supplier chain finance Who provided you with finance? How much was the loan? Purpose of the loan Interest rate charges Terms of the loan Loan requirements How loan money was received How is the money collected What other support did you receive from Woolworths Woolworths, SA Interlining distributors, Spotti Cow weavers, International Trims and Labels, Boxes for Africa etc 23, all employees are owners as well (the nature of a cooperative is that all members are owners. Management is a temporarily structure to show previously disadvantaged members how to successfully run a company and set up strict structures within the business) Not known Woolworths and Old Mutual Not Known We needed the capital to buy fabric for the orders at hand and thus used the loan for that. It was a rather smooth experience as it was an in house loan as such. Not Known Woolworths deducted over three payments. Will only start to repay Old Mutual after 9 months of loan approval. We received orders from Woolworths, thus they were assured of repayment. Old Mutual required our financials and commitment from Woolworths to continue using us to supply them (as long as our products were up to standard and pricing remains competitive) Woolworths paid it into our account Old Mutual paid our suppliers. Woolworths nets off our invoice Old Mutual is by debit order. Short courses Woolworths installed an invoice system and provided training on how to utilise the system FinMark Trust: Supplier Chain Credit Report 58

59 Annexure C: Macha Electrical Case study Mr. Enoch Sithole is an electrician and owns Macha Electrical with his wife. Their sole client is Barloworld, which subcontracts Machas to provide electrical services. Early 2009 was not a good year for Machas, as the restructuring in Barloworld left them with little work. The company went into financial trouble, and ended up owing SARS R Mr. Sithole approached Barloworld with this financial predicament, and the company agreed to lend him R to pay off SARS. However, before the money was offered, Barloworld appointed business analysts to review Machas and its systems. They also contracted an accountant to assist Mr. Sithole with his books. It was only after Barloworld was satisfied that Machas systems were satisfactory, that they paid SARS R Business details: The major clients: How many employees Barloworld 6 permanent staff and 10 temporary staff. Estimated turnover R7 million Supplier chain finance Who provided you with finance? Barloworld How much was the loan? R Purpose of the loan Interest rate charges Terms of the loan To pay off the South African Revenue Services (SARS) Interest free To be repaid once the business has taken off Loan requirements No collateral was required. SMME only signed acknowledgement of debt. How loan money was received What other support did you receive from Barloworld Barloworld paid SARS directly Barloworld contracted a business analyst to streamline our systems for free An accountant was hired to work on our books at no cost to us. FinMark Trust: Supplier Chain Credit Report 59

60 Annexure D: The Nafin Factoring Case Study The exhibit below provides an example of the Nafin factoring programme in Mexico as documented in detail by Klapper (2003), in which she points out that Nafin is a successful example of reverse factoring in a developing country. It is important to point out the lessons learnt from the Nafin factoring program as it may have bearing to the South African market where invoice factoring has not find a place yet to the significantly benefit SMMEs. Firstly, factoring remains the most inexpensive form of financial support for small suppliers in Mexico. Most of the suppliers in Mexico who participate in this scheme have no other form of formal financing. Secondly, the Nafin programme illustrates the way in which the use of electronic channels can cut costs and facilitate lower interest rates to small suppliers. Nacional Financiera (Nafin) development bank in Mexico Nafin provides online factoring services to SMME suppliers, facilitating business between big buyers and small suppliers via an on-line portal. During 2000, Nafin was given a mandate by the Mexican government to use new technology to provide micro-enterprise and SME loans. The programme is known as Cadenas Productivas and operates by creating chains between big buyers and small suppliers. Nafin has established chains with 190 big buyers and more than small suppliers. About 20 domestic lenders (banks and other finance companies), participate. Factoring is provided without recourse nor any collateral or service fee, - The maximum interest rate is 7 percentage points above the current bank rate, which is about 8 percentage points below commercial bank rates. - The sale of receivables from the supplier and the transfer of funds to the supplier are conducted electronically once the SME is registered on-line and has an account with the bank or factor. The bank becomes the creditor and collects the loan when the buyer pays the supplier in 30 to 90 days. - Nafin s role is to make available an Internet site with dedicated pages regarding every big buyer and, most importantly, handles the selling and delivery of electronic documents. Additional contracts are in force between Nafin, banks and buyers, stipulating, for example, that buyers need to remit factored receivables directly to the banks. Although buyers are of good standing, the risk to lenders remains that a buyer could return unsuitable goods to a supplier. Nafin and buyers assist in reducing this risk to the banks in a two-fold manner. Buyers invite or pre-select sellers to join the chain and participate in the programme, and will do so only after an initial period of trading with a supplier. In addition, in the case of returns, the factor receives future receivable payment directly from the buyer via notifications and structuring on the Nafin website. FinMark Trust: Supplier Chain Credit Report 60

61 Annexure E: The Wall Mart Factoring Case Study Example of Reverse Factoring for Wal-Mart suppliers Since the financial crisis became a reality, large companies have investigated various strategies to assist key suppliers during the turbulent times, albeit changing payment requisites, providing direct financing, or by means of other techniques. During November 2009 Wal-Mart introduced a supplier finance programme to an elite group of 1000 clothing suppliers (from Wal-Mart suppliers). The programme was based on reverse factoring whereby suppliers could sell their Wal-Mart invoices to Wal- Mart s banking partners, Citigroup and Wels Fargo & Corp. Terms of the finance model A supplier of Wal-Mart would receive payment within days of delivering goods to Wal-Mart as opposed to the usual days. At the time of first receiving the order, an eligible supplier could approach one of the before-mentioned banks and sell its Wal-Mart invoice to the bank. Financing by the bank is at a favourable rate as it is based partly on Wal-Mart's strong financial position rather than on a higher rate that would typically have applied given the relatively high risk of the supplier. The benefit to the supplier is that it is able to obtain working capital finance at a reasonable rate while Wal-Mart is assured of the fact that its supplier is able to deliver products during difficult economic times. The finance house is also disinclined to extend money as repayment in circumstances in which it is underpinned by the good credit rating of Wal-Mart. FinMark Trust: Supplier Chain Credit Report 61

62 Annexure F: List of Interviewees Scoping Interviews / Enquiries Organization Name Contact Details UNISA -BMR Prof. Andre Ligthelm [email protected] Centre for SMME Development (Head), University of Johannesburg, Soweto Campus Mr. Thami Mazwai The Business Trust Mr. Golden Mahove WIZZIT Brian Richardson (CEO) [email protected] Business Enterprises at University of Pretoria Barbara Calvin (Head) [email protected] Franchise Association of SA Vera Valasis (Dep. Chair) [email protected] Standard Bank SA Shimone Fontes (Head of Compliance) [email protected] FNB Louis v.d. Merwe (Head Agri Finance) [email protected] University of Pretoria (Dept of Agri- Prof. Johann Kirsten (Head Dept. of Agri- Economics) Economics) [email protected] US AID Financial Sector Development Programme Tocher Mitchell [email protected] FinMark Trust: Supplier Chain Credit Report 62

63 Supplier chain financiers and others Anglo Zimele Mr. Peter Mothudi - Snr Manager: Supplier Chain Finance Mondi Zimele Jason Smith (CEO) [email protected] Builders Warehouse Mr. Mpho Mokete and Mr. Cashbuild Clive Kneale (Company Secretary)/ Vera Hoge (PR) [email protected] AFGRI Riaan van Schoor (Head of Financial Services) [email protected] Senwes Gerrit van Zyl (Head of Credit) [email protected] Vrystaat Kooperasie Head of credit Sugar Association Of SA Nathi Kunene / Mkonza Mhlongo [email protected] TSB Sugar Roger Armitage [email protected] Ilovo Sugar Eric Arde [email protected] Barloworld Matthew Govender Nashua Mobile Jessie Makhudu (Transformation manager) [email protected] SA Breweries Chris Meyiwa [email protected] Regent Factors Ms. Jesse Vengrow Capital Mr. Leslie Matlaisane New Business Finance Ms. Petunia Makeleni Marang Financial Services Ms. Christina Mapasa HPBuisness Institute Program Sheryll Sukhoo (head of HP BIP) [email protected] HP Finance Sedik Shaik (Manager HP Finance) [email protected] FinMark Trust: Supplier Chain Credit Report 63

64 Woolworths Kenneth Carden (Enterprise Development Manager Shoprite Brian Weyers (Group Marketing Director) Interviews with beneficiaries Macha Electrical Mr. Enoch Sithole Niche Logistics Mr. Deon Leminine Ubuntu Ms. Stephanie Avis Pretoria Mr. Vernon Vivier Various attempts were made to engage with the following people Massmart Mr. Brian Leroni Suzanne Ackerman s, Leonora Sauls, Pick n Pay Graeme Laithwaite [email protected]; [email protected] Sasol Ms. Bridgette Backman [email protected] SASDA Mr. Lunga Saki [email protected] Quince Capital (Nashua Finance) Kumba Pricilla Pholoto Khula FinMark Trust: Supplier Chain Credit Report 64

65 FinMark Trust: Supplier Chain Credit Report 65