Alternative financing explored
http://www.theindependent.co.zw/
Thursday, 04 August 2011 16:15
Julius Chikomwe
FINANCE minister Tendai Biti, last week indicated in his mid term fiscal
review that the country had limited fiscal space within which to manoeuvre.
This resulted in him allocating a paltry US$70 million towards the Zimbabwe
Economic Trade Revival Facility (ZETRAF). The minister lamented the absence
of alternative sources of finance for business.This article gives insight on
some of the alternative finance avenues Zimbabwean business might consider
exploring
ALTERNATIVE financing, as the name suggests, is business finance from other
sources other than commercial lending institutions. Alternative financing is
normally used by smaller businesses. The reason is that, unlike the bigger
and more established businesses smaller businesses, in most of the cases, do
not meet the two major requirements under which banks are willing to advance
credit-collateral security and business records.
In the context of Zimbabwe, one can say that there are about seven
alternative sources of funding. We will examine five of them; factoring,
community banks, venture capital, credit unions and yes-friends and family.
Factoring
Factoring receivables basically involves a business selling its yet to be
collected invoices to an institution established for this purpose at a
discount. Why would a factoring company be interested in this sort of
arrangement? Well, mainly because it realises a margin in each case, which
is basically the difference between the discounted value of the invoice and
full value of the invoice when the invoice is eventually settled. Pretty
easy isn’t it? No.
Firstly, because factoring companies, like commercial lending institutions,
exercise usual credit judgment and are unlikely to want to take risks unless
the invoice that is the basis of the proposition is from a reputable
company. Secondly given the high interest rates commercial banks are
charging, it would seem that factoring companies would charge more than
what banks are charging. As a result, this would render this particular
financing method less attractive to small businesses.
Community banks
Community banks, unlike commercial banks, are driven by developmental rather
than commercial considerations. Their primary objective is to overcome the
barriers that prevent many small businesses from accessing business
financing from the conventional sources. They seek to achieve this through
less stringent lending requirements and offering their target market cheaper
money. This sort of funding is usually specific in terms of both the target
sectors and beneficiaries that may access it.
The POSB serviced the market for a very long time. But, as we know, the POSB
left this market when it converted into a commercial bank. It is hardly
surprising therefore that there is no reputable institution that is
filling the gap that was created by the POSB’s exit. Some could argue that
Sedco is playing a role in this area. But even if this were the case, at
the rate at which Sedco is going we might need life times to notice their
impact. In short, a lot more needs to be done. Perhaps the honourable
minister needs to come up with policies that will demonstrate the government’s
appreciation of the special needs of this sector. In addition, there is the
need to incentivize private companies and developmental organisations to
invest in this sector.
Venture capital
Under this option, the owner of the business sells part of the business in
exchange for capital injection by the venture capitalist. The arrangement is
usually for a fixed time period, at the end of which, the venture capitalist
is expected to exit. The exit, of course, would be in terms of previously
agreed options.
This option is the least burdensome on small businesses. They just need to
get professional advice when entering into such arrangements so that they
can avoid entering into one sided arrangements that are detrimental to
themselves and the country. In the preceding sentence, I have implied that
venture capital would have to come from without. The reason is that venture
capital is supposed to be patient capital, with arrangements taking on
average between 5 and 10 years. It does not seem that Zimbabwe has, at this
stage, capital that can be that patient.
Significant changes have taken place in Zimbabwe during the last decade
regarding ownership of the means of production, particularly in the
agriculture and mining industries. However, many of the new owners lack the
necessary skill and capital to make a positive contribution towards
improving their own lives and the country’s economy. With the right policy
framework, this would be a viable option for bridging the capital and skills
gap that so many farmers and owners of mining claims face today.
This option dovetails with the government’s economic aspirations in the
sense that investors do not become perpetual owners but exit at the end of
an agreed term. Finance minister Tendai Biti may want to consider this as a
viable policy option for translating indigenisation policies into something
meaningful for Zimbabwe’s mining claim holders and landowners who can’t
afford to pay US$300 schools per term while they are sitting on a farm or
mine that could potentially bring them a better life.
Credit unions
Another alternative funding source is credit unions. Most of these were
buried during the hyperinflation years. There is need to revive this
particular sector as it is cheap and very effective way of mobilising
finance amongst members of a credit group. Credit unions are an attractive
source of funding for group members because the administrative routines for
accessing the money are usually very simple. In addition, it provides a
useful learning ground for members to understand the basics of business and
managing credit on a very small scale. Both sets of skills become
increasingly useful as the business grows.
The trade union movement should lead the way in setting up and propagating
credit unions. Employees and family members of employees would benefit from
raising money for informal businesses so as to diversify their sources of
income and to reduce dependence on wages as the only source of income.
Friends and family
Friends and family are an alternative source of financing. This particularly
so when one is embarking on a new business, when it is not clear if the
business is going to survive. Friends and relatives are a useful source of
money for the promoter of a small business to establish its basic
infrastructure and facilities. More importantly, it creates a window through
which the promoter of the business can begin to develop the reputation of
the business and setting up basic business infrastructure such as record
keeping, a necessary requirement of the business needs formal borrowing
facilities even with non-conventional sources of capital.
In this article, I have confined myself to the alternative sources of
financing that are relevant to Zimbabwe. This is not an exhaustive list of
all the possible sources of alternative financing.
Conclusion
A lot has happened since 1997 when Zimbabwe’s financial health began to
decline. This was followed by decade-long hyperinflation. Hyperinflation has
since been superseded by low inflation. But the market is still very
illiquid.
Zimbabweans now have the resources. The number of small business has
increased as a result of the policy of indigenisation. But, they do not have
the capital and or skills that would enable them to derive a meaningful
livelihood and generate wealth from the resources that they now own. The
policy framework, on the funding side, has largely remained the same as what
it was a decade ago.
The needs and priorities of Zimbabwe’s small businesses have changed; they
are now completely different from those that existed a decade ago. There is
therefore the need for the Ministry of Finance to come up with a policy
framework will attract investments through alternative sources of capital to
meet the needs and priorities of a nation that is now empowered but still
needs capital to take the final step towards translating empowerment into
meaningful economic participation.
Julius Chikomwe is an LLM (Finance and Law) Student at Duisenberg School in
Amsterdam, Netherlands.