Finance for SMEs

[planeta]

TOPIC: Finance for SMEs
1. SME finance needs

MODERATOR: Jeanine Corvetto

SETTINGS: Active participants can reply to this topic

PARTICIPANTS:
http://www.planeta.com/ecotravel/tour/e ... .html#part

REFERENCE

Ecotourism Emerging Industry Forum (Nov 1-18, 2005)
http://www.planeta.com/ecotravel/tour/emerging.html

[planeta]

Discussion is invited in this topic. We are are seeking specific examples of SME finance needs

[redbilb]

My company is a fairly small company and we have had great successes domestically in developing community-based tourism products.

Part of reason for success is our ability to be flexible, deal with our clients at a personal level that larger companies cannot do. This is a real advantage for us domestically.

However, on the international front, being small seems to be a distinct disadvantage. We have been working on the development of a sustainable tourism product in Guyana for a little over a year now. We have overwhelming support from the community, Ministry of Tourism, and other partners involved.

The difficulty is funding. Our company is too small to qualify for most funding sources. CIDA has a fund in Guyana that has had $5 million dollars annually to spend. In three years not one cent has been spent because every company that has applied has failed to meet the eligibility requirements.

To access the funds, we will be forced to merge with a larger company to meet their requirements. I am resisting doing this because I feel it will significantly reduce our chances of being able to offer the one-to-one personal service that has been our trademark and may ultimately compromise our project. It is a very difficult situation. We have already invested a considerable amount of time, effort and dollars and have demonstrated that even though we are a small company we can accomplish the goals of the project.

BOT agreements are another option for financing but again they are not too practical for a small company.

Anybody else have any thought on the role of small companies in international tourism projects?

Rod Bilz
FRi Ecological Services

[Jeanine Corvetto]

Hello All

Welcome to Finance for SMEs! My name is Jeanine Corvetto and I will be your moderator for this topic. I would like to invite all of you to provide your comments regarding your experience in financing your small/medium sized businesses. I would like to thank Rod for starting this discussion with his comments regarding the difficulties he has faced in financing a small start up ecotourism business.

regards
Jeanine Corvetto

[Jeanine Corvetto]

Hello Everyone

I wanted to ask you some specific questions regarding your experience in financing your businesses. In the study I co-authored for the IFC with Megan Eplerwood and Pam Wight regarding Ecolodge finance I found that traditional financing through banks was often difficult. Here are some questions:

1. Have you found traditional banks that are willing to lend to your organization?

2. If so what are their terms and conditions? Do they require collateral or other guarantees?

3. What other sources of financing have you used?
- For start up
- Working capital
- Expansion

I look forward to your feedback!

regards

Jeanine Corvetto

[oliver]

Just a quick reply to Rod's very good point. Banks, of course, and development agencies as well, want to lend money to those who do not need it... SMEs are the victims of statistics, or what is usually called actuarial sciences - the chances that an SME will default on payments or project goals is unfortunately often greater than with larger corporations. Those SMEs (quite common in ecotourism) that are serious and could be fully trusted pay the price.

I followed the successful journey of an ecotourism operator in Peru, Rainforest Adventures, and continue to be a fan of theirs. One of the interesting things they did to grow since 1998, and to be able to cover the "externalities" of working in developing countries (Ron will kill me for this comment) was to associate themselves with NGOs, learn fundraising from them and cultivate donors for grants (not loans), using the true argument that they are alleviating poverty, conserving biodiversity and working for the common good. Well, some may say that partnering with NGOs is as much selling your soul as partnering with larger corporations to access the CIDA funds, but I wonder whether Rod considered turning the Guyana project into a "fundable" project to raise grant funds for?

[planeta]

Introducing the Sustainable Tourism Bank Watch
http://www.planeta.com/ecotravel/tour/bankwatch.html

In the past few years experts have reported a high failure rate of internationally funded tourism projects, particularly in the realm of 'sustainable' travel and ecotourism. Precise figures and stats are hard to come by as institutions provide little public evaluation of this work.

It is time to ask financial institutions to be more effective and that requires improved communication.

Ecotourism and sustainable tourism have long been touted as key tools in conserving wildlife and developing local economies. The United Nations declared 2002 the "international year of ecotourism" and while there were a number of agreements and declarations, follow-up work since 2002 has been uneven.

What could be different? Financial institutions could make the contract process and the evaluation available in a reader-friendly format on the Web. They could post in-depth project development reports and offer access for stakeholders to comment about work in progress.

To build a constituency for such innovative work, Planeta.com has launched the Sustainable Tourism Bank Watch (STBW) to bring together multiple stakeholders -- including donors, communities, operators and media -- to review current financing of sustainable travel and ecotourism offered by International Financial Institutions (IFIs).

The STBW is not the typical 'watch dog' organization that distances itself from the institutions. The approach we have chosen is one that is more inclusive.

Institutions financing ecotourism, sustainable travel and responsible tourism are highlighted on Planeta's Financing Sustainable Tourism index
http://www.planeta.com/ecotravel/tour/e ... fspot.html

To their credit, many financial institutions do provide information such as basic details of projects in the pipeline. What is lacking are details such as request for proposals and project evaluations. In fact, the request for proposals may be issued through the backchannel (email) with a two week window. This information is either not present on the institutional websites or difficult to locate.

In the past year Sustainable Tourism Bank Watch has published a half dozen original in-depth Q&As with bank staff at the Inter-American Development Bank Sustainable Tourism Policies, the World Bank and USAID. The project also links to resources published elsewhere on the Web, including criticisms of ecotourism certification prepared by Indigenous Tourism Rights International and questions raised by the Ethnotourism Project Mesoamerica.

The rationale is simple. Development banks are rarely aware of independent concerns about projects they have funded as they only hear from the project coordinators. The coordinators evaluate themselves and rarely inform funders of criticisms.

RECOMMENDATION -- Sustainable Tourism Bank Watch (STBW) could be expanded if it were funded. Currently, it's run zero budget and good will. We need to work beyond the Web to create a supportive environment within the institutions so that timely information is shared, and that will take time. We also need to develop capacity-building workshops within the institutions. This includes reviewing their own websites as seen from the outside and implementing improvements (both short- and long-term improvements).

Question -- is this fundable?

[redbilb]

I would like to respond to Oliver's point about being innovative in the funding approach. The problem for a small company considering BOT agreements is that often you are not in the business of operating a tourism facility. I would have to shift the focus of my business and a wholesale change in staff to operate a tourism facility to regain my investment.

I have recently considered partnering with a local college that has an Ecotourism Program and is interested in having a practical, real-life experienc for the students and graduates. Using these trained individuals there may be a possiblitiy of looking at BOT agreements.

[Meganew]

HI everyone,

I was just doing a review of a business plan for an NGO in Central America that manages an ecotourism program. This business plan had been commissioned and paid for by a larger NGO. I was asked as a technical expert on business plans in ecotourism to review this plan. I was given some great guidelines for reviewing this business plan.

The business plan did not clearly delineate between the goals and objectives of the NGO overseeing the ecotourism project and the goals and objectives of the tourism program as a business. The goals of the business were given as standard NGO sustainable development objectives. But it was never clearly outlined how the tourism business's funds would be used by the NGO. There were no financials provided for the NGO, just the tourism operation.

There was a fundamental confusion in the document about if the tourism program was there to actually create a viable and profitable concern or to provide a certain amount of funds to the NGO on an annual basis.

I think that such a business plan would have to be very clear about the relationship of the ecotourism operation and its financials to the larger NGO budget at a minimum. But this raised so many other questions about how an NGO can manage a tourism business, and if it is really possible to write a business plan that does not create clear, legal boundaries between the business of ecotourism and the NGOs needs for operational funds.

So from my point of view, it is really not adviseable to use an NGO structure to manage ecotourism. While it is not impossible, I was struck by how very, very sophisticated the business plan would have to be to make boundaries clear. I have seen some pretty sophisticated business planners work out similar issues in my time - but in this case, I found myself wondering why we would want small local NGOs taking on such a big challenge. It would be so much simpler to separate the two entities.

From the finance perspective, I think the issue is particularly dicey, as the NGO was seeking investors to underwrite their capital costs, but in this plan they were not offering a rate of return on investment. That seemed odd to me, but I was thinking they were assuming that they would receive these 'investments" as donations, thereby avoiding the problem of having to pay back their investors. That led me to think that the NGO was really mixing apples with oranges, calling a donation an investment. But beyond that, they were just hoping their tourism business would be viewed by investors as a good cause. I didn't see why an investor would look at it that way.

I think this example shows the real difficulty of trying to mix these two types of models. Especially at the stage where new funds are needed for expansion - I was really wondering what investor would just give the money away to support a "business." It seems really tricky indeed.

Megan

[redbilb]

I had originally invited the representative from CIDA (Canadian International Development Agency) that I have been dealing with in Guyana to monitor this forum to give them a better understanding of the challenges tourism developers and operators face in developing economies.

He didn't reply and just recently a new person has been appointed to his post last week. I extended the invitation to the new representative as well. I have not heard back from him either at this point.

I would encourage others to invite those agencies you have dealt with in the past and may deal with in the future to have a look at these proceedings as well.

[Jeanine Corvetto]

In the IFC study regarding Ecolodge Finance I found that most SME ecotourism business managers had limited previous financial management experience and relied on ìa learn as you goî approach to financing their businesses. The most successful lodges/ecotourism businesses were able to creatively combine several sources of funding to finance their construction and operations. Financing sources primarily included their personal funds and sweat equity, community sweat equity contributions, loans from local development banks, international financial institutions and local banks and grants from NGOs. Only a few businesses had an investor equity model where a large percent of the funding came from private equity investors. For the most part, finding longer term affordable financing sources was a huge challenge, even for those businesses that had sustainable business models. Partnerships with NGOs, communities and other private sector operators often improved the profitability and viability of ecolodges and ecotourism operators SMEs.

The financing challenges mentioned above are those faced by all SMEs no matter the sector. This is the reality of many small business around the world. However, ecotourism businesses face greater challenges because their business models are more complex since they depend upon a sophisticated international tourism marketplace where competition is local, regional and international. Therefore lending or investing in these businesses presents greater risk than for the average business. Micro credit organizations have found a way to manage the risk associated with lending to small businesses. Is there a model that could be developed to assist ecotourism SMEs?

It seems to me that we need to understand the risks associated with these businesses and then find mechanisms to mitigate these risks/costs. One way to mitigate the risk is through creative partnerships where private business partners with NGOs, communities, IFIs, and international donors. It does not appear that initiatives by NGOs or international donors have a good record of success. There are a substantial number of the projects sponsored by NGOs and international institutions that have failed because the business plans were lacking and they did not have professional managers to operate the business. On the other hand, NGOs have unique skills and assets that can help businesses reduce the costs associated with building a triple bottom line business model.

How can more of these partnerships be developed? What have we learned from those business models that have worked?

It would be great to hear from those SMEs that have experience with these creative financing partnerships!

[Canyon Travel]

Greetings, all

Emilio Kifuri here with Canyon Travel http://www.canyontravel.com

In partnership with local communities, my company has built several lodges in the Sierra Madre (Copper Canyon). I was able to do this because I have 30+ years of experience and enough business (paying customers) to finance the construction or renovation of rural lodges.

First, a word about "ejidos" in Mexico. The land distribution system in
which Mexico is very different than other countries. In our case, the ejidos
are the owners of the lodges because they are the land owners. My agreement is to pay the ejidos rent, to train and employ ejido members, to subcontract services like horseback riding and pack donkeys, to purchase produce from them and to bring interested buyers for their crafts. This gives the ejidos an income which offers an alternative to just selling their forest to logging companies.

My company was able to construct lodges in the scenic locations without
having the upfront costs of purchasing the land. Building sites were chosennot only for their beauty but also for their available water sources, a problem in much of arid Mexico.

Let me be frank about the risk in investing in this type of project. Ejido
members, being of indigenous and mestizo descent, are the most
disenfranchised members of Mexican society. The state and federal
governments made grants available to ejidos to build lodges as long as the travelers were backpackers and the lodges would not be in competition with the commercial lodge owners. This is one example of what Antonio Suarez calls the "cabaÒizacion" of Mexico. Lodges are built but not designed to be successful in the marketplace.

A few years ago Canyon Travel negotiated an operating contract with a lodge that been built but had not been maintained. Again, thanks to having asuccessful business already in place, we were able to bring the lodge up tostandards for an upscale market with a focus on birding.

Let me be candid. This has been expensive! Operating costs include factors such as replacing tires every three months. I'm hampered by high financing costs, such as 14.9% for vehicles. Training local guides and providing full time employment even during the off season is particularly expensive but absolutely necessary for our market. Our tour opearor's insurance has increased by 300% from last year. Income generated from catering to backpackers would be insufficient to cover the operating costs for developing such tourism services. Competion from other operators with less expensive independent trips intentionally blur the distinction between their services and ours.

I hope this snapshot of our operation contributes to this engaging dialogue
on ecotourism. I am particularly interested in working with others in
promoting a more "eco" vision of travel in Mexico.

My thanks to Meagn and Ron for hosting this informative forum

Emilio Kifuri

[planeta]

One of the surprises of this conference is that the "Finance" topic has turned out to be the least popular in the forum (in terms of views and number of posts). Perhaps it is due to a 'been there, done that' outlook by SMEs or the fact that many businesses are trying to adapt to a changing marketplace and the other topics appear more relevant.

I would like to mention that one of Planeta.com's most popular online conferences was 2002's Financing Sustainable Tourism
http://www.planeta.com/ecotravel/tour/e ... ncing.html

The index of funding sources is updated on a regular basis (and your assistance is always welcome)
http://www.planeta.com/ecotravel/tour/e ... fspot.html

One of the key successes of the 2002 conference was the fact that we were able to conduct a two-day retreat in Mexico City. With colleagues at IMAC (Mexican Conservation Learning Network) we conducted a review and brainstorming session that I consider a model of how physical, face-to-face conferences can build upon what has been discussed in an e-forum.

As the Ecotourism Emerging Industry Forum comes to a close, I would like to thank everyone who has participated in the Finance topic. The examples offered here have been candid and quite insightful.

[oliver]

The point about the "cabanizacion" is so common - investments are made NOT with a view to creating sustainable businesses, but to give politically influent players something to chew on until the next election - preferably buildings. If the request had been technical assistance, no can do... There are sooo many "ecolodge" buildings done without consideration of management, ownership and market, rotting all around the world...

The issue of offering feasible (i.e. relatively attractive) credit to SMEs in ecotourism destinations is another "make or break" factor, along with infrastructure. Emilio's problem is the same in all developing destinations - in spite of so many development agencies and banks creating some "soft loan" options, those programs get to the actual sites at 30-45% annual interest rates, and demand counterparts and guarantees that are insurmountable. Yet there's hope: as far as I know, so many organizations/banks are taking sustainable tourism more and more seriously that I believe some reasonable micro-and mediumlending experiences should happen within the next 5 years. As an initial contribution to the banks willing to take this up, I'd say work should initially concentrate on:

- creating pilot pipeline credit lines (why not begin with a few million US$ as a test?) specially adapted to sustainable tourism, to be distributed by local banks: these should be compatible with the specific needs of the industry (often more on "soft" than on "hard" components, i.e. financing working capital, marketing initiatives, operating equipment, training and pre-feasibility studies rather than only facilities and/or land), minimizing risks by providing technical assistance in business plans and commercial partnership building, requiring strict operational safety procedures (to reduce insurance rates), addressing the need for guarantees (by accepting value not only for titled land, and by examining options for bank guarantees and reinsurance), adapting pay-backs to business cycles in tourism (2-3 years to establish a brand, creating systems to adapt payments to seasonal variation). It is actually not difficult once there's a strategic decision.

- Building the capacity of local bank branch managers to understand sustainable tourism. Often, banks have programs available for this (just ask and they'll tell you that there's no need to create such a credit line because it's already there...), but fact is local bank loan officers know about crops, home building, financing stock and export, car leases, cattle and fishing boats, but have no clue what to do about ecotourism. If a bank launches a program for SMEs in tourism, it's essential to bring in the interface with the client - the local development bank officers who process the actual credit application (and is the one to say no to potential applicants).

- Actively sending savvy scouts to look for those rare combinations of capacity/value and market growth that would make successful demo loan cases. Of course, many good candidates do not go to banks (they look for something closer like venture capital or relatives, even loansharks). Often, the ones that show up at bank branches are the shadier dealers who know the bureaucracy...

[Jeanine Corvetto]

Hello Everyone!

Tomorrow is the last day of the forum and I encourage those who have not contributed to please give us your valuable insights regarding your experience with financing your businesses.