Enclude, an advisory firm providing integrated capacity building and capital services in developing countries, rolled out a solution that will enable Small Growing Businesses in development countries to secure funding and grow on one side and allow local banks and international investors to participate in their growth by proving capital and other banking services.
The firm believes that capacity building and finance have to work hand-in-hand, especially for the SME segment. All of Enclude’s projects incorporate this philosophy. They are also focused on SGB development and helping lenders understand the difference between SGB and SMB.
An SMB is primarily a lifestyle business with the typical aim of creating a job for the owner and his family. It is usually destined to remain small in size throughout its lifecycle. An SGB (Small and Growing Business) is an SMB focused on growth and scale. As they are growing aggressively, SGBs are usually asset light, and cash flows are irregular. Also, they don’t usually qualify for VC funding because they are not in hot sectors like technology or consumer internet.
Enclude wants to create a platform that is able to identify SGBs, help them grow with continued education and mentoring, and help local banks tie up with impact investors to take on the risk of providing such enterprises with much-needed financing. Enclude also wants to replicate this model in multiple developing countries.
Opened doors for Impact Investors
Enclude has paved the way for impact investors who were looking to make stable returns but also trying to create a positive impact in the world either socially or economically through their investments. Third-party impact investors participate in the loans through local banks and Enclude acts as the project manager. The firm deals with impact investors, business development service providers, the local bank, and any other relevant player in the ecosystem.
This is a huge win for impact investors, as well, because investing in developing countries’ SME loans on an individual basis is an expensive affair mainly because of multiple layers of due diligence; therefore, making the investment on the back of partnerships with local banks is a much more secure and profitable avenue for them.
Pilot Project in Nicaragua
Although the groundwork for the project has been completed in Nicaragua, and the project was initiated in November 2015, it is still in the nascent stage. More importantly, initial vitals of the project are positive and based on that the firm is planning to launch in other countries of Central America and the Caribbean in Phase 2, then later in South America and other countries.
So far, the project has been able to originate loans worth $300,000-$400,000 with an average loan size in the $20,000 – $22,000 range. The project is funded by USAID Pace, an initiative that acts as a bridge between the private sector and promising new businesses.
Under this project, the loan is given out for a maximum period of five years, payments are variable, and the borrower has to pay a fixed percentage of its business revenue to repay the loan. As per the credit model, a business that is doing well will be able to pay off the loan in 3.5 to 4 years. APR and other terms of the loans vary from country to country. A benchmark reference rate would be around 16%-18% for these markets.
Assistance to SGBs
By integrating the synergies with Agora Partnerships, a pioneering BDS, Enclude endeavors to provide assistance to SGBs by offering them a platform for capacity building so as to reach the desired level of growth. Moreover, it gives proper training and mentoring, which helps in reducing default rates and skills the entrepreneur in necessary business skills like accounting, marketing, etc. It is a two-year mandatory course for all the borrowers, and Enclude follows up to ensure that the SGB is getting the maximum benefit from the course.
With the success of its pilot project in Nicaragua and its expansion phase well underway, Enclude hopes to touch the elusive $1 million mark in loan origination before the end of 2017 and hit $7-$8 million by next year.
Triodos Facet, a consulting company specializing in micro-finance (Zeist, NL), and Shore Bank International, a consulting company formed by Shore Bank (Washington, DC), came together in 1988 and gave birth to a new consulting firm in 2013 known as Enclude. Headquartered in Washington D.C., Enclude has registered offices in Sub-Saharan Africa, Asia, Latin America, the Caribbean, Europe, and Central Asia. It continues to be affiliated with Triodos Bank of the Netherlands.
The company is not motivated by profits but wants to ensure that it at least breaks even on an operating level.
Enclude is not doing anything new. Its innovation efforts combine financing for SGBs along with helping them to grow. This is a win-win for all involved as it helps SGBs grow, reduces bank default rates, and impact investors are able to help small businesses in developing countries while achieving a small profit in return.
Written by Heena Dhir.