Using alternative financing tools to improve agribusiness finance

by Yan Zhangyan.zhang@unctad.orgUNCTAD

Caribbean Rural Development Briefings18-19 October 2010, Grenada

Agriculture in CARICOM

Agriculture is an important contributor to economic growth and sustainable development of CARICOM member countries.

However, the development of agriculture is facing many challenges both at national and international levels.

Over the last decade, both public and private investment in the agriculture has declined.

It is crucial to increase agricultural investment and finance.

Main contraints in accessing agricultural finance

Agricultural sector often perceived as high risk by many financial institutions;

Lack of sufficient eligible collateral; High financing costs; Lack of tailor-made financial products to meet

specific needs of agricultural borrowers; Inadequate access to information on available

financing schemes/products; Lack of support to build bankable projects.

Structured commodity vs. Traditional financefinance

Transaction based Looking to the flow of

the goods Focus on borrower’s

perfomance capacity Innovative loan security

(commodities or future proceeds)

Balance-sheet based Looking to the flow of

funds Focus on borrower’s

creditworthiness Traditional loan security

(savings, physical assets, third party guarantee)

UNCTAD’s thematic work under the AAACP

Agricultural commodity financing (e.g.warehouse receipt financing)

Commodity exchanges Market information service

- Infocomm: http://www.unctad.org/infocomm

- Infoshare: http://infoshare.unctad.org

Sustainability claims portal

- http://193.194.138.42/en/Sustainability-Claims-Portal/

ALL ACP Agricultural Commodities Programme, funded by the European Union

UNCTAD’s working approach on agricultural commodity finance

To develop appropriatefinancing mechanismsfor specific commodity

Capacity building on alternative financing

instruments

To create an enablingenvironment for

agricultural commodityfinance

Improving access to finance by

small producers and SMEs

Agricultural commodity financing projects in the Caribbean region

Regional - Caribbean regional capacity building

workshop on factoring/receivable discounting

(November 2009 in Barbados)

National (Grenada)

- Improving nutmeg value chain financing

Regional capacity building workshop on factoring/receivable discounting

Background:

Delayed payment by buyers to farmers who are selling agricultural commodities to the main players of the tourism industry;

Demand for innovative and suitable financing instruments to reduce risk at farmers’ level and facilitate trade

Regional Capacity building workshop on factoring/receivable discounting

Objectives:

1. To raise awareness and build capacity in the area of factoring and invoice discounting as a financing technique that can be used to help farmers access financing;

2. Help to integrate small-scale farmers into the supply chain of the tourism industry.

Key issues on factoring

US definition on factoring

" a continuing arrangement between a factoring concern and the seller of goods or services on open account, pursuant to which the factor performs the following services with respect to the accounts receivable…"

1. Purchases all accounts receivable for immediate cash;2. Maintains the ledgers and performs other book-keeping

duties;3. Collects the accounts receivable;4. Assumes losses which may arise from the customer’s non-

payment.

Key issues on factoring

Fondamental points: Short-term, working capital financing Serve SMEs with large number of transactions Finances only post-invoice contractual obligations Factor needs confidence that Buyer accepts goods There needs to be absence of continuing obligations

by Seller after delivery of goods

Domestic factoring flowchart

1. Seller submits the request to the Factor.

2. Factor considers Buyer’s creditworthiness and approves financing limit. Factor and Seller sign factoring agreement.

3. Seller delivers the goods to Buyer and issues the invoices.

4. Seller assigns the invoices to Factor and informs Factor of any special payment arrangements.

5. Factor finances the value of the invoices at the previously agreed rate.

6. Factor collects receivables at the end of the credit period.

7. Factor remits to Seller the balance in excess of the finance cost.

Seller Buyer

Factor

③

① ② ④ ⑤ ⑦ ⑥

Main findings of the workshop

In general, the region would follow the UK legal framework on the sale and purchase of invoices and the rights of creditors in the event of a buyer’s insolvency.

Development banks and farmers associations are working together to identify solutions to improve farmers’ access to finance.

There are a number of initiatives, though at various stage of development, in moving in the direction of developing factoring and invoice discounting as a financing solution to improve farmers’ cash flows.

Way forward

Development banks - take the lead in developing factoring scheme based on their specific country conditions;

Farmers' organizations and SMEs – training on the mechanism and impact of factoring scheme;

Ministries - informed from the beginning to provide necessary support in the legal, regulatory and taxation areas;

Regional financial institution and organizations - technical assistance to the specific project based on stakeholders' demand;

International organizations - capacity building activities

Improving nutmeg value chain financing in Grenada

Objective:

To carry out a study to analyze the nutmeg value chain, identify gaps and bottlenecks for finance, especially those related to financing smallholders, and provide recommendations on how to improve nutmeg sector financing in general and to facilitate access to finance by smallholders in particular.

For more information on UNCTAD’s work under AAACP:http://www.unctad.info/en/Special-Unit-on-Commodities/Events-and-Meetings/All-EU-ACP-/

Thank you!

Merci beaucoup!