Small and medium enterprises (SMEs) are the engine of growth and employment in developed economies, accounting for over 50% of GDP and 60% of employment. In stark contrast, SMEs in emerging and frontier economies struggle to grow and consequently account for a mere 17% of GDP and 30% of employment. The reasons for this are myriad, with factors such as poor infrastructure and imperfect regulatory environments inhibiting the growth of formal private enterprise.
However, much of this can be attributed to a very simple reason – most enterprises require money to make money. Access to finance is cited as the most significant constraint to enterprise growth by SMEs in emerging markets, with theIFC estimating a $1 trillion credit gap . They lack the collateral, financial history, and track record required by traditional lenders, while also generating lower revenue per client.
Given our interest at Ceniarth in helping to address these SME financing hurdles, we are delighted to announce our recent investment in Advance Global Capital (AGC). AGC is a relatively new fund manager that works directly with local financial institutions in emerging markets to channel vital working capital to SMEs. AGC is uniquely focused on factoring and invoice discounting as a means of mitigating credit risk and addressing the SME finance gap.
Invoice Discounting: how does it work?
Many business transactions do not involve immediate payment, delaying re-investment by entrepreneurs. SMEs are often forced by larger buyers to accept payment terms ranging from 30-120 days – and the smaller the supplier, the less leverage they have to demand better terms. AGC unlocks the value of invoices as financeable assets, through local financial institutions, known as “factors”, or directly via invoicing technology platforms, through a process called invoice discounting. In this arrangement a factor purchases approved invoices at a discount and advances funds to the supplier immediately, based on the financial history of the buyer, enabling them to buy more materials and hire more people to grow their business. The full amount of the invoice is then collected from the buyer when it comes due.