Improving BSO Services and
SME Performance Through
Cleaner Production
[SPEAKERS NAMES]
[DATE]
Module 8:
Financing Cleaner
Production
8.1:
Understanding loan
approval at commercial
banks
Possible funding channels for CP
Shareholders
(equity offering)
Governmentsubsidized
credit
Public/ODA sources
Commercial
Banks
Leasing
companies;
equipment
vendors
• Environmental revolving
loan funds
• Development banks &
credit schemes
• Ex/Im finance guarantee
schemes
International
Development
Assistance
Company
Internal sources
Commercial
sources
Partners/
owners
Customer
firms
Credit cooperatives/
unions
Improving MSME Performance through Cleaner Production.
Module 8: Financing CP. Visit www.encapafrica.org.
Cash
reserves
3
Our focus: commercial banks
 Difficulties in accessing
commercial credit are one
of the largest challenges
involved in implementing
CP capital investments,
particularly for SMEs.
!
 Many development
organizations engaging in
SME support projects and
SMEs themselves have little
experience in dealing with
commercial banks
!
Improving MSME Performance through Cleaner Production.
Module 8: Financing CP. Visit www.encapafrica.org.
?
4
Background: Commercial Banks
Commercial
Banks:
Acquire funds by receiving
money from savers: savings
accounts, deposit accounts, etc.
Provide funds to borrowers
through term loans, lines of
credit, bonds, etc
The interest payments on loans
are used to pay interest to
depositors & are a primary
source of profit for the bank
To be profitable/sound,
commercial banks focus on:
maximising their returns &
minimising the risks they accept
Improving MSME Performance through Cleaner Production.
Module 8: Financing CP. Visit www.encapafrica.org.
5
!
Therefore:
their principal
expertise is
evaluating borrower
credit-worthiness. . .
not the performance
of CP investments!
Improving MSME Performance through Cleaner Production.
Module 8: Financing CP. Visit www.encapafrica.org.
6
Commercial bank financing instruments
For SMEs, commercial banks offer two
main types of financing instruments:
 Issued for a specific project/purpose
1
Term Loans
 Specific amount and term (months or
years)
 Interest rate will reflect risk & may be
fixed over time or variable
2
Lines of Credit
 Can usually be used for any purpose
 Approved up to a credit limit. The
customer can use any amount up to
the limit.
 Higher interest rates than term loans.
Interest is charged only on credit
actually used.
Improving MSME Performance through Cleaner Production.
Module 8: Financing CP. Visit www.encapafrica.org.
7
Commercial bank loan procedures
1
Commercial
banks’ loan
procedures
have 4
basic
stages
Application
2
3
Review
applicant prepares proposal
and submits to bank
failure
Bank evaluates
application and sets
or negotiates
conditions
Award
Paying
4
back, with
interest
Improving MSME Performance through Cleaner Production.
Module 8: Financing CP. Visit www.encapafrica.org.
We will examine
at each stage in
more detail
8
Commercial bank loan procedures
Application
1
Application
a. Before applying to any particular
bank, research and review
potential funding sources
b. Have initial informal discussions
with bank loan officer
c. Fill out bank’s loan application
form; obtain all necessary data
d. Submit the loan application and
supporting documents to bank.
!
Establishing a personal relationship
with the bank/loan officer is very
important!
Improving MSME Performance through Cleaner Production.
Module 8: Financing CP. Visit www.encapafrica.org.
9
Commercial bank loan procedures
Application review and loan award
2
3
Review
Award
Application
More information
requested
Review
Negotiate
terms*
Agreement
on terms?
Review
and award
involve the
following
steps:
NO
YES
Funds
received
Improving MSME Performance through Cleaner Production.
Module 8: Financing CP. Visit www.encapafrica.org.
Loan
agreement
signed
Commitment
letter
& term sheet
*Terms include, e.g. interest rate,
repayment period & collateral
10
Commercial bank loan procedures
What is the basis of the bank’s review?
The bank’s review
of the application is
focused on two
distinct aspects of
risk:
 economic viability of the
specific project
 the financial/economic
status of the enterprise as
a whole


Often more important!
Improving MSME Performance through Cleaner Production.
Module 8: Financing CP. Visit www.encapafrica.org.
11
Basis of Review #1
Economic viability of the project
?
How does the bank assess
the economic viability of the
project?
NPV is the mostly commonly
used overall indicator.
HOWEVER,
the bank will calculate multiple
values for NPV using different
assumptions regarding the
performance of the project
Improving MSME Performance through Cleaner Production.
Module 8: Financing CP. Visit www.encapafrica.org.
E.g. what is the
effect on NPV of
different sales,
savings,
schedules?
12
Basis of Review #2
Company financial and economic status
?
How does the bank assess
the enterprise’s financial and
economic status?
The bank assesses 3 Key factors:
 LIQUIDITY
 Isexpenses?
there cash on hand to pay day-to day operating
 SOLVENCY
the company have the ability to repay
 Does
outstanding long-term debt?
 Prospects for future PROFITABILITY
its implications for both liquidity and
 and
solvency over the expected term of the loan.
Improving MSME Performance through Cleaner Production.
Module 8: Financing CP. Visit www.encapafrica.org.
13
Barriers to
Commercial Bank Finance for SMEs
For SMEs,  Small size of SME CP Projects
 Means that the bank’s
access to CP
administrative costs are very high
finance is
compared to the profit it can make
on the loan
constrained
by:  High perceived risk of lending
to SMEs
 Insufficient accounting and
business documentation (poor
record-keeping)
 Limited banking track record (no
history of obtaining and
successfully repaying loans)
 Lack of security (collateral)
Improving MSME Performance through Cleaner Production.
Module 8: Financing CP. Visit www.encapafrica.org.
14
!
It is true that
some barriers to commercial bank loans
and (other CP financing) cannot be
addressed by the SME alone
BUT SOME
BARRIERS CAN
BE ADDRESSED
Improving MSME Performance through Cleaner Production.
Module 8: Financing CP. Visit www.encapafrica.org.
15
What can SMEs do to address these barriers?
 Understand banks’ decision criteria
and analyse CP projects in these
terms
 Improve record-keeping and
management systems (utilize BDS
services if available)
 Identify banks that do have SME
lending programs; request an
informational interview with a loan
officer before applying
Improving MSME Performance through Cleaner Production.
Module 8: Financing CP. Visit www.encapafrica.org.
16
Module 8:
Financing Cleaner
Production
8.2:
General trends in CP
financing in developing
areas
“Friendly trends” in commercial banking
We have now discussed
many barriers to financing
CP projects at SMEs
HOWEVER, THERE IS
GOOD NEWS.
Some current trends
in commercial banking
are “friendly” to CP
financing:
similarity among
 Increasing
financial institutions

Expanded commercial bank
activity in developing
countries
interest in
 Increasing
sustainable banking
Improving MSME Performance through Cleaner Production.
Module 8: Financing CP. Visit www.encapafrica.org.
18
Increasing similarity among financial institutions
Traditionally,
different types of FIs
specialized narrowly
in their own areas.
This is still true to
some extent, but
becoming less so.
Many FI’s are
expanding their
product-ranges into
others’ areas
Improving MSME Performance through Cleaner Production.
Module 8: Financing CP. Visit www.encapafrica.org.
borrowers, result is a wider
 for
range of potential sources of
finance
!
Be prepared to approach
several different FIs of different
types to raise finance on
attractive terms
19
Sustainable Banking
FI’s are becoming
more aware of
their
environmental
responsibilities in
lending. This
emerging trend is
focused in
developing
countries
Thus, at many international
banks, we see a shift. . .
From traditional
passive attitudes. . .
Passive with respect . . .to “sustainable
to environmental
banking”
issues.
Reject financing of
environmentally
Resist responsibility
damaging projects.
for environmental
impacts of projects
Recognize business
they finance
& social benefits of
environmental
investments
Improving MSME Performance through Cleaner Production.
Module 8: Financing CP. Visit www.encapafrica.org.
20
Policy & development approaches
to overcome finance barriers
 Business development service
providers can work with
 SMEs, particularly to improve recordkeeping
 FIs, to demonstrate that CP investments
pay
 Special financing facilities for SMEs
and for CP investments
 Civil Society & business
associations: Lobby Government for
supportive policies
Improving MSME Performance through Cleaner Production.
Module 8: Financing CP. Visit www.encapafrica.org.
21
Module 8:
Financing Cleaner
Production
8.3:
SME Financing in XXX.
 This presentation to be developed specifically for
the host country context
Improving MSME Performance through Cleaner Production.
Module 8: Financing CP. Visit www.encapafrica.org.
23
Module 8:
Financing Cleaner
Production
8.4:
Participants’ experiences
in financing projects.
Group Exercise:
Analyzing past funding experiences

You will identify one or more past funding
experiences to CHARACTERIZE and
ANALYZE, answering the questions on the
following slides.
See exercise instructions
in sourcebook
Improving MSME Performance through Cleaner Production.
Module 8: Financing CP. Visit www.encapafrica.org.
25
GROUP
EXERCISE
Past funding experiences
Analyze your funding experience by addressing the
following questions:
? What was the project?
The basics:
? Which sources of finance were considered?
The financing search:
Which sources were then approached?
? What information was required to make the application?
The application:
Could you provide this information?
Improving MSME Performance through Cleaner Production.
Module 8: Financing CP. Visit www.encapafrica.org.
AND
26
GROUP
EXERCISE
Past funding experiences
? What were the funder’s criteria for approving or rejecting
The review:
the application? Were these clear?
Did any problems arise during the review process?
? Was financing obtained?
The outcome; terms and conditions:
What were key terms and conditions?
!
Lessons learned:
What do you think is the reason for your
success/failure? What did you do right? What
would you do differently? What advice can you
offer from this experience?
Do you still have unanswered questions from
this experience?
Improving MSME Performance through Cleaner Production.
Module 8: Financing CP. Visit www.encapafrica.org.
27
GROUP
EXERCISE
Past funding experiences

GROUP PRESENTATIONS.
Improving MSME Performance through Cleaner Production.
Module 8: Financing CP. Visit www.encapafrica.org.
28
Some lessons learned
by participants in past courses
PROBLEM
Solutions that worked
!
Project
profitability is
poor
Re-evaluate profitability using total
cost principles
!
management is
unable or
unwilling to issue
more shares or to
raise debt
Lease capital equipment rather than
purchase it.
!
the firm does not
have contacts
with commercial
banks
Make contacts through the chamber
of commerce, BDS provider,
accounting firm
Improving MSME Performance through Cleaner Production.
Module 8: Financing CP. Visit www.encapafrica.org.
29
Some lessons learned
by participants in past courses
General Advice

Rejection from one FI indicates little.
Search widely for alternative sources of
finance. The larger the number of
possibilities you consider, the more likely
you are to obtain financing... and on better
terms

If you are rejected, apply again when the
national economic situation improves/
credit is loosened.

Seek advice from experts and from
contacts in other firms
Improving MSME Performance through Cleaner Production.
Module 8: Financing CP. Visit www.encapafrica.org.
30
?
Do we agree with these
lessons learned?
?
What lessons learned can
we add?
?
Are these lessons fully
relevant to CP financing?
Improving MSME Performance through Cleaner Production.
Module 8: Financing CP. Visit www.encapafrica.org.
31
Point for discussions
Improving MSME Performance through Cleaner Production.
Module 8: Financing CP. Visit www.encapafrica.org.
32