WWW.ABSTRACT.DISLIB.INFO
FREE ELECTRONIC LIBRARY - Abstracts, online materials
 
<< HOME
CONTACTS



Pages:   || 2 | 3 | 4 |

« ...»

-- [ Page 1 ] --

ASSET-BASED FINANCE

WHITE PAPER #1

CONTENTS

Acronyms

Introduction

Executive Summary

A. Asset-Based Finance

A1. Background

A2. Instruments and Applications

A2a. Accounts Receivables Finance

A2b. Warehouse Receipts

A2c. Purchase Order Finance

A2d. Factoring

A2e. Leasing

A2f. Asset-Backed Securities

A2g. Islamic Finance

B. Access to Asset-Based Finance

B1. Legal, Regulatory, and Judicial Environments

B2. Secured Lending and Collateral Registry

B3. Credit Information Bureau

B4. USAID Development Credit Authority Guarantee Program

B5. Industry Associations

B6. International Standards

B7. Shariah compliance

C. Experiences with Asset-Based Finance

C1. Warehouse Receipts

C2. Purchase Order Finance in Bolivia

C3. Factoring

C4. Leasing

C5. DCA Guarantees

Annexes Annex A. Bibliography

ACRONYMS A/R accounts receivable DCA Development Credit Authority EGAT USAID Bureau for Economic Growth Agriculture and Trade FS Share Financial Sector Knowledge Sharing Project IAS International Accounting Standard IFC International Finance Corporation MSOW model scope of work OECD Organization for Economic Co-operation and Development POF purchase order finance SME small- and medium-sized enterprises SOW scope of work SPV special purpose vehicle WHR warehouse receipts

INTRODUCTION

The USAID Bureau for Economic Growth Agriculture and Trade (EGAT) created the Financial Sector Knowledge Sharing Project (FS Share) to collaborate with USAID missions to develop effective and efficient financial sector programs that increase access to financial services and develop well-functioning markets worldwide. USAID awarded Chemonics International Inc. the FS Share delivery order under the Financial Sector Blanket Purchase Agreement. FS Share has a 3-year period of performance, July 2008 through July 2011.

Through the FS Share Task Order, USAID/EGAT and Chemonics proactively collaborate with missions to identify priorities and develop strategies and programs for growing the financial sector. FS Share identifies financial-sector best practices and aggregates them through model scopes of work (MSOW), primers, diagnostic tools, best practice case analyses, white papers, and other tools. These deliverables are disseminated to USAID missions for use in financialsector programs. FS Share can assist with implementation and connect mission staff to external resources on best practices. In response to mission demand, FS Share delivers presentations and other knowledge-sharing endeavors.

Objective of this White Paper

The objective of this white paper, Asset-Based Finance, is to provide U.S. government program designers with a basis of technical understanding on asset-based financing as an approach to meet the operation and expansion needs of small- and medium-sized enterprises (SMEs). The paper summarizes different instruments of asset-based financing, describes when and how the instruments may be used in technical assistance interventions, and lists the programmatic prerequisites necessary to develop a project that provides or reinforces access to asset-based financing by banks and non-bank financial institutions.

This FS Series was authored by Francois-Jude Pepin and reviewed by Roberto Toso and Melissa Scudo for Chemonics International.

FS Share Rapid Response Hotline For assistance identifying resources and addressing questions about asset-based finance, please contact FS Share Project Manager Roberto Toso at 202-955-7488 or rtoso@chemonics.com, or Deputy Project Manager Melissa Scudo at 202-775-6976 or mscudo@chemonics.com. To access the FS Share delivery order and EGAT assistance on any mission financial-sector program,

scope of work (SOW), or procurement questions, contact:

–  –  –

ii ASSET-BASED FINANCE: WHITE PAPER # 1

EXECUTIVE SUMMARY

This white paper provides U.S. government program designers with a basis of technical understanding on asset-based financing as an approach to meet the operation and expansion needs of SMEs. It summarizes seven types of asset-based financial products, when and how they may be used in technical assistance interventions, and the programmatic prerequisites necessary to develop a project that provides or reinforces access to asset-based finance as a financing practice for banks and non-bank financial institutions.

The products reviewed in this paper are accounts receivables (A/R) finance; warehouse receipts (WHR); purchase order finance (POF); factoring; leasing; asset-backed securities; and a few of their equivalents in Islamic finance.

A/R finance and WHR are available from banks and specialized commercial lenders;

asset-backed securities are a capital market instrument. However, each requires welldeveloped secured lending infrastructure or investment securities law. Non-bank financial institutions and bank subsidiaries provide factoring and leasing; they separate this type of lending from their related deposit-taking activities. These instruments can reasonably exist within a country’s normal legal framework.





–  –  –

A1. Background Banks often do not deliver the types of financial products SMEs need, especially in developing markets. Bank lending to SMEs is often for lines of credit, not transactionbased short-term working capital. For their own credit-rating requirement, banks separate riskier asset-based activities from regular banking activities. Furthermore, banks do not usually have the skill set required for SME financing or the resources to closely monitor the assets. They often do not know how to use or modify the product or deliver it profitably to SMEs.

To deal with more frequent and larger orders — two requirements for growth — SMEs need short-term working capital for inputs such as raw materials and packaging. Most SMEs cannot satisfy banks’ lending criteria (e.g., financial transparency, audited statements, and real estate or other collateral), and most banks do not accept growth opportunities or trading assets as a basis for providing financing.

Therefore, SMEs need to be able to borrow against their assets, as in factoring, to speed up their collection rate and recycle their working capital faster, which allows them to extend credit terms to potential customers or lease revenue-generating equipment.

Asset-based finance allows SMEs to utilize commonly produced assets (e.g., purchase orders, A/R, inventory, equipment, and real estate) as a source of liquid funds. It is suited to SMEs because it does not require them to qualify for traditional bank loans or limit them to financial products short of meeting their borrowing needs. By contrast, manufacturers or equipment suppliers often readily provide leasing as a part of their sales/marketing activities.

With conventional lending, the asset or collateral is viewed as a secondary source of repayment. With asset-based lending, the asset or collateral is viewed as the primary source (Bakker, Klapper and Udell, 2004, p.10). This is advantageous for undercapitalized companies with well-performing receivables or those that are growing or expanding faster than their cash flow intake. It works well with producers, manufacturers, distributors, and service companies with a leveraged balance sheet, and whose seasonal needs and industry cycles often disrupt their cash flow.

A2. Instruments and Applications A2a. Accounts Receivables Finance A/R financing is based on an asset constituted of final sales of goods or services on credit terms (i.e. payment in 30 days), that can be pledged as collateral to a bank or commercial finance corporation to secure a loan, a line of credit facility, or a cash advance.

This conversion of sales on credit terms to A/R Financing immediate cash flow provides the SME with A/R financing is also referred to as flexible working capital when previous earnings do receivable factoring, invoice factoring, not qualify the SME for a loan or an increase in a or cash flow factoring.

line of credit from a financial institution. The A/R line of credit facility or cash advance is determined by the credit strength of the SME’s customers, not the SME itself. The maximum amount of credit an SME can receive is determined by a formula linked to the liquidation value of the A/R pledged as collateral.

The lender monitors the value of A/R so it does not exceed the amount of the line of credit (USAID, 2009a, p. 11).

A2b. Warehouse Receipts

Also known as inventory credits, a WHR finance system is based on receipts or ―warrants‖ that prove ownership of a specific non-perishable commodity of a stated quality and condition stored in a specified location. When the commodity is pledged or sold by mere delivery of the receipt, the buyer or pledgee bank has the assurance, without physical inspection, that the specific commodity will be available when it is required.

Development donors have promoted WHRs to facilitate the financing of agricultural production, trade, and processing as instruments that can be pledged as collateral for credit against the inventory of the stored commodity. WHRs enable smallholder farmers to participate more actively in the broader market of agricultural products. Before the loan matures, a farmer and its pledgee bank will likely agree to sell the stored commodity to a processor at the most opportune time (i.e., at the best price). Upon repayment of the loan with the sales proceeds, the WHR is released by the lender and delivered to the buying processor.

–  –  –

WHRs are also an integral part of agricultural and non-agricultural commodities futures exchanges because they allow commodity trading via the delivery of receipts rather than the actual commodity (Emerging Markets Group, Ltd., 2007). An exchange’s rules can specify the grade of a commodity and warehouse standards. To leverage the high capital investment and operating costs required for WHR systems, the development of WHRs for 2 ASSET-BASED FINANCE: WHITE PAPER # 1 financing and a commodity futures exchange could be linked in the design of a comprehensive agricultural commodity infrastructure program (Lacroix and Varangis, 1996, p. 38). This will foster a market economy by removing government subsidy intervention. It will also provide better price information for farmers, which can improve their livelihoods.

A2c. Purchase Order Finance

POF is not a general loan or line of credit; it is a transaction-specific form of short-term working-capital finance. POF allows an SME to obtain the capital necessary to fill a particularly large customer order — larger than it could fill without assistance —that may present a growth opportunity. The capital finances the purchase of the raw material, packaging, production, and shipment of the goods ordered by the client.

POF is provided by specialized commercial financiers, usually managed by trade finance and merchant banking professionals, and professionals from manufacturing and trading.

Banks and non-bank financial institutions do not provide POFs.

POF requires close monitoring of an SME’s operations and production (i.e., track record of production and timely delivery). It presents higher risks and requires higher interest rates and fees than other asset-based products (USAID, 2009a, p. 16). The financier must verify the purchase order from the SME’s commercial or government buyer and obtain estimates based on actual quotes of direct costs to determine the exact amount. The financier must also continually review and monitor the SME’s labor and production costs breakdown, operating records, and customer creditworthiness.

–  –  –

A2d. Factoring Factoring and POF can work in tandem. Whereas POF funds the production phase, factoring finances the collection phase, after the order has been completed and delivered.

Like A/R finance (and unlike POF), factoring eliminates the risk that the supplier will not produce and ship the goods.

Customers issue purchase orders for an SME’s goods or services. The SME delivers them and issues its invoice to its customers with terms of payment (30 or 60 days). During this

–  –  –

Factoring provides a source of finance based on an SME’s asset. It converts the payments the SME will receive in 30 or 120 days into immediate funds. The SME sells its A/Rs to a factor, which pays the SME a discounted price (50-80 percent of the A/R’s face value), free of any lien. The factor will pay the SME the balance, less interest and service fees, when it receives payment from the SME’s customers.

The sale of the A/R is an essential element of the factoring transaction. The factor owns the A/R and is protected from an adverse change in the SME’s financial situation, unless it has retained the right to claim against the SME if its customers do not fully pay receivables. Such ―recourse factoring‖ is more frequent in emerging markets where default risk assessment is problematic (Klapper, 2005, p.7).

Factoring differs depending on the functions a factor performs. Finance and collection without maintenance of accounts is invoice discounting. Traditional factoring is usually limited to commercial receivables, excluding consumer receivables, and is more popular with SMEs that cannot or do not want to employ full-time staff to manage credit. When an SME resorts to factoring, it in effect outsources its credit and collection functions to the factor. The factor assesses the creditworthiness of the SME’s customers (whose accounts it will purchase) using its own proprietary data and publicly available data on account payment performance. The factor also manages A/Rs (a process called ledgering), collects delinquent accounts by giving past-due notice to the SME’s debtor and ultimately initiating judicial proceedings, and bears the debtor’s payment risk (known as non-recourse factoring).



Pages:   || 2 | 3 | 4 |


Similar works:

«Journal of World Anthropology: Occasional Papers: Volume III, Number 2 1 Caching, Money, Magic, Derivatives, Mana and Modern Finance Niccolo Caldararo1 Abstract This paper investigates aspects of economics in the context of animal caching and the nature of investment devices in cross-cultural comparison, placing special attention on the new global issues of money, hedge fund contracts, derivatives and other riskspreading concepts and practices. The function of these are compared to the behavior...»

«law Mbe innovation Business Technology International Conference in business, innovation and technology Chapter: Management, Business, Economics and Law organized by: In partnership with: IFAC ACADEMIC EXCHANGE ACADEMIC EXCHANGE FOR PROGRESS FOR PROGRESS KOSOVO ASSOCIATION FOR MANAGEMENT ubt publications, nov 2013 Proceedings of the 2nd Annual International Conference on Business, Technology and Innovation Chapter: Management, Business, Economics and Law Edited by Edmond Hajrizi November, 2013...»

«ADOPTION OF INFORMATION AND COMMUNICATION TECHNOLOGY (ICT) IN SMALL AND MEDIUM ENTERPRISES (SMEs): THE CASE OF CAMEROON A THESIS SUBMITTED FOR THE PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE MASTERS OF BUSINESS ADMINISTRATION IN INNOVATION AND TECHNOLOGY MANAGEMENT BY Ntwoku-Tchuinkep Habib GRADUATE SCHOOL OF MANAGEMENT RITSUIMEIKAN ASIA PACIFIC UNIVERSITY, JAPAN July 2011 CERTIFICATION This thesis entitled “Adoption of Information and Communication Technology (ICT) in Small and Medium...»

«#YoungTreps2014 Young Entrepreneurs Trip to Israel #YoungTreps2014 Young Entrepreneurs Trip to Israel Dear Programme Participants, Congratulations on being selected to participate in our first-ever Young Entrepreneurs Trip to one of the most entrepreneurial countries, Israel. With the highest number of start ups per capita of any nation in the world and massive venture capital investment, Israel has many entrepreneurial lessons to offer. Your inclusion in this trip is recognition of you and...»

«Developing appropriate incentives for improving water quality in the Burdekin River catchment Allyson Lankester1 and Romy Greiner2 1 ACTFR, James Cook University, QLD, 4811. Email: allyson.lankester@jcu.edu.au 2 River Consulting, 68 Wellington Street, Townsville, QLD, 4812 and School of Business, James Cook University, Townsville QLD, 4811. Email: romy.greiner@riverconsulting.com.au Abstract Achieving a reduction in the discharge of diffuse agricultural water pollutants from the Burdekin River...»

«CHRISTA H.S. BOUWMAN January 2016 Associate Professor of Finance (with tenure) Tel. 979-845-4894 Mays Business School at Texas A&M University, Wehner 360H Nationality: US Citizen College Station, TX 77843 cbouwman@mays.tamu.edu AREAS OF INTEREST Financial Intermediation, Corporate Finance, Mergers and Acquisitions, Behavioral Finance, and Corporate Governance. AFFILIATIONS Texas A&M University Associate Professor of Finance and RepublicBank Research Fellow (with tenure) (2014 – now). Case...»

«The Significance of Foreign Direct Investment to Caribbean Development By Ronnie Griffith1 and Kimberly Waithe Economic Affairs Division Research and Planning Unit Ministry of Finance, Economic Affairs and Energy and Roland Craigwell Department of Economics University of the West Indies Cave Hill Campus August 2008 Correspondence Address: Ronnie Griffith Senior Economist, Research and Planning Unit, Economic Affairs Division, Ministry of Finance, Economic Affairs and Energy, 3rd Floor Warrens...»

«Our Bottom Line “Be yourself; FINANCE AND BUSINESS SERVICES AUGUST 2013 everyone else is It is hard to believe that we are about to enter the last quarter of 2013. Summer is certainly on its way with the warmer weather and longer days of already sunlight!!! I have been lucky enough to visit a number of our new buildings (Advanced Engineering Building; Global Change Institute Building and taken.” ― Learning & Innovation Building) recently at St Lucia. Wow, they are beautiful facilities...»

«For Immediate Release December 2009 PRESIDENT OBAMA’S MOTHER’S DISSERTATION PUBLISHED 14 YEARS AFTER HER DEATH Duke University Press Proud to Publish S. Ann Dunham’s Surviving against the Odds: Village Industry in Indonesia Duke University Press is proud to announce the publication of an anthropological study by S. Ann Dunham, the mother of President Barack Obama. Dunham, who died in 1995, completed the dissertation in anthropology for the University of Hawaii in 1992. Surviving against...»

«Is the 1918 Influenza Pandemic Over? LongTerm Effects of In Utero Influenza Exposure in the Post-1940 U.S. Population Douglas Almond Columbia University and National Bureau of Economic Research This paper uses the 1918 influenza pandemic as a natural experiment for testing the fetal origins hypothesis. The pandemic arrived unexpectedly in the fall of 1918 and had largely subsided by January 1919, generating sharp predictions for long-term effects. Data from the 1960–80 decennial U.S....»

«High Availability and Disaster Recovery Solutions for Perforce This paper provides strategies for achieving high Perforce server availability and minimizing data loss in the event of a disaster. Perforce Consulting consulting@perforce.com Contents Introduction.................................................... 2 Defining Business Objectives..................................... 3 Configuring Hardware for...»

«United States Senate Committee on Finance The Savings & Investment Bipartisan Tax Working Group Report July 2015 July 7, 2015 MEMORANDUM To: Chairman Hatch and Ranking Member Wyden From: Savings & Investment Co-Chairs Crapo and Brown As co-chairs of the Tax Reform Working Group on Savings and Investment, we present to you this report on behalf of the group, whose membership also includes Senators Burr, Isakson, Heller, Scott, Menendez, Cardin, Casey, and Warner. We thank Tom Barthold and the...»





 
<<  HOME   |    CONTACTS
2017 www.abstract.dislib.info - Abstracts, online materials

Materials of this site are available for review, all rights belong to their respective owners.
If you do not agree with the fact that your material is placed on this site, please, email us, we will within 1-2 business days delete him.