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$1m Factoring Scheme In Sme Funding 'Firsts'

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A "first ever" $1 million accounts 'factoring' scheme aims to aid "well over 100" Bahamian small businesses immediately following its summer 2018 launch. Omni Financial Group, the Bahamian payments solutions provider, yesterday hailed its partnership with the Inter-American Development Bank (IDB) as potentially boosting cash flow, growth and customer base for local micro, small and medium-sized enterprises (MSMEs). With the IDB's Multilateral Investment Fund (MIF) providing the financing, Omni will effectively act as its 'executing agency' by making small loans secured against the accounts receivables (debts) owed to qualifying Bahamian MSMEs by their clients.

This is known as 'factoring', which is commonplace in most economies, but has never been done in a structured way in the Bahamas. The Bahamas Agricultural and Industrial Corporation (BAIC) will work with Omni to identify potential lending clients, and develop the benchmarks and rules that MSMEs must meet to qualify for the micro loan facility.

Harvey Morris, Omni's chief executive, told Tribune Business that while the scheme would boost access to capital for an 'underserved' element of the private sector, it will also impose "long-term discipline" on MSMES when it comes to financial management.

He explained that the ultimate goal was to enable MSMEs to grow to the point where they could access more traditional forms of capital, such as debt financing provided by commercial banks, thereby stimulating economic growth, entrepreneurship and job creation.

Mr Morris suggested Omni's IDB partnership was "the first time that factoring has been done" in such a structured way in the Bahamas, with the parties "leaning towards" a model where the payments solutions provider paid the full invoice value - minus a small discount - to the MSE upfront.

While some factoring schemes only pay a proportion of the invoice value, Mr Morris added that the preferred model would better "increase the supplier's [MSME] cash flow".

"We are going to work with known purchasers and suppliers, and once the supplier has delivered the products his invoice is brought to us," the Omni chief explained. "We will discount the invoice at an amount to be determined, because we got an exceptional rate on this facility from the IDB, and those funds will be paid to the supplier immediately."

Using a 5 per cent discount rate as an example, Mr Morris said Omni would pay the supplier $9,500 on a $10,000 invoice. The payments provider would then treat the invoice as its own receivable, collecting repayment from the borrower's client after one-three months depending on the payment terms.

Mr Morris said the scheme aimed to enhance MSME cash flow and liquidity by giving them instant funds to restock inventory, enabling them to start the product and supply cycle much quicker than if they were waiting for client payments.

"The benefit for them is to replenish their inventory," he explained to Tribune Business, "and it also gives them the opportunity to negotiate sales with suppliers [clients] who they will not normally deal with now because those suppliers have a longer payments cycle.

"The SME may have put all of his money in because financing may be difficult for him, so all funds go into products. He has a good receivable, but how does he replenish inventory to produce another set of products?"

Mr Morris said this was the problem that Omni's partnership with the IDB is seeking to solve, and he suggested that "well over 100" MSMEs will be assisted "in the very early stages".

"The intent is to try and provide the funding to persons who don't have any access to financial services; credit services," he told Tribune Business. "We're looking at farmers, we're looking at cottage industries, we're looking at persons providing services to the Government.

"This year our [Omni's] focus is on providing financial inclusion to MSMEs. It's badly needed, but a lot of people, because they're not aware of the service, they have a receivable and wait it out while their business suffers.

"In speaking to members of BAIC, once we started the education process, everyone gave us a scenario where the product could have helped them if available before."

Mr Morris said Omni had been working on the factoring product's development for 18 months prior to yesterday's formal unveiling, with its actual launch scheduled for summer 2018.

He added that the IDB will now arrange for Omni's team to visit other countries that employ MSME factoring schemes, so it can obtain "complete knowledge" before completing its own version;

"The next step is the completion of the conditions precedent," Mr Morris said. "A key one is entering into an agreement with BAIC to assist in the screening of SMEs, and further review and development of the final product for approval by the IDN and our Board. As far as the process is concerned, we have probably another three to six months to complete the next phase."

Seeking to manage expectations, he added that yesterday's signing with the IDB did not mean the factoring scheme will launch today. "This does not mean the IDB will disburse the funds to us and we'll be lending tomorrow," Mr Morris said. "It requires a lot more due diligence."

He explained that one of the conditions required to qualify for factoring is the presentation of an invoice to "a reputable company that can settle that invoice on the due date", thereby minimising risk for Omni and the wider programme.

"The short term benefit to the sector is the capital," Mr Morris told Tribune Business, "but the long-term benefit is financial discipline and chance to demonstrate their ability to serve a facility from a commercial bank.

"It's our hope many of these clients will be graduated. This product was tailor-made for us by the MIF in the Bahamas. And the IDB continues to encourage us to provide financial inclusion for all."

The $1 million represents the first time the MIF, the IDB's private sector arm, has made a non-grant disbursement in the Bahamas.

Comments

banker 1 year, 10 months ago

This is a bad idea. There is no legislation in place, and this will result in usurious practices. Oftentimes the margins on business are very small to begin with, and the percentage that the factoring company will take will wipe out profits.

For those of you who don't understand factoring, it is like a payday loan for business. A business has accounts payable and the customer is slow on paying. So they sell the invoice to the factoring agency at a discount. So if the bill is $100 dollars, they sell it to the agency for $90 or $85 dollars. Then the agency chases the payment, often going to court. Businesses that are desperate will do that.

I urge the Minnis government to enact consumer protection laws to prevent usury and to protect businesses from sharks. This is another practice that makes me want to take a shower when I read about it. This ultimately hurts the lower end of the economic spectrum more than it helps. They are preying on the misfortune of businesses having customers that do not pay on time.

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