P a g e | 1 HANDBOOK FOR SME ACCESS TO ALTERNATIVE SOURCES OF FINANCE IN ASEAN NOVEMBER 2018 This publication was produced by Nathan Associates Inc. for review by the United States Agency for International Development. P a g e | 2 HANDBOOK FOR SME ACCESS TO ALTERNATIVE SOURCES OF FINANCE IN ASEAN SUBMITTED TO ASEAN Coordinating Committee on MSME (ACCMSME) and the ASEAN Business Advisory Council (ABAC) DISCLAIMER This document is made possible by the support of the American people through the United States Agency for International Development (USAID). Its contents are the sole responsibility of the author or authors and do not necessarily reflect the views of USAID or the United States government. P a g e | 3 ACKNOWLEDGEMENTS This handbook was prepared by Dr. Hazik Mohamed, Managing Director/Head of Business Intelligence & Strategic Advisory, Stellar Consulting Group Pte Ltd, Singapore. Hazik is a business strategist with substantial market research, operation management and start-up experience. The handbook was prepared during April – June 2017, with a draft version submitted in May 2017 for the consideration of the ASEAN Coordinating Committee on Micro, Small and Medium Enterprises (ACCMSME). We thank the ASEAN Member States and the ASEAN Secretariat who reviewed and provided helpful comments to the draft handbook. P a g e | 4 CONTENTS 1. INTRODUCTION .............................................................................................................. 5 1.1. BACKGROUND ............................................................................................................. 5 1.2. TYPES OF ALTERNATIVE FINANCING AVAILABLE IN ASEAN ........................................... 6 1.3. RECENT INFORMATION AND DATA ON ALTERNATIVE FINANCING IN ASEAN .................. 12 2. FINDING LENDERS AND INVESTORS IN ASEAN ..................................................... 17 2.1. FINANCIAL AND NON-FINANCIAL NEEDS OF ASEAN MSMES ....................................... 17 2.2. COMPILATION OF PE/VCS PLATFORMS ...................................................................... 19 2.3. COMPILATION OF SOCIAL IMPACT INVESTOR PLATFORMS ............................................ 28 2.4. COMPILATION OF EQUITY CROWDFUNDING PLATFORMS.............................................. 29 3. ACCESSING ALTERNATIVE SOURCES OF FINANCE .............................................. 32 3.1. FINANCING OPTIONS .................................................................................................. 32 3.2. THE BUSINESS PLAN ................................................................................................. 37 3.2.1. Key Elements of a Business Plan...................................................................... 38 3.2.2. Sample Business Plans ..................................................................................... 40 3.2.3. Particular Information Emphasis by Funders (Pitch Material) ........................... 62 3.2.4. Investors' Assessment of Value ........................................................................ 63 3.3. UNDERSTANDING THE LANGUAGE OF LENDERS AND INVESTORS ................................. 64 3.3.1. Financial Projections and Performance ............................................................. 66 4. FINANCIAL MANAGEMENT ......................................................................................... 70 4.1. ENTREPRENEURS : QUESTIONS TO ASK YOURSELF (PLANS FOR NEW CAPITAL) .......... 70 4.2. MANAGING WORKING CAPITAL ................................................................................... 73 4.2.1. Sources of Working Capital ............................................................................... 73 4.2.2. Key Elements to Capital Management .............................................................. 74 4.2.3. How to Calculate Your Business and Trade Cycles .......................................... 75 4.2.4. Working Out Your Working Capital Lines for Your Business ............................. 76 4.3. MANAGING CAPITAL EXPENDITURE ............................................................................ 77 4.3.1. Case Study 1: A Village Artisan Enterprise ....................................................... 78 4.3.2. Case Study 2: A Contract Manufacturing Company .......................................... 78 4.3.3. Lessons for Entrepreneurs ................................................................................ 79 5. FUTURE OF ALTERNATIVE FINANCE ....................................................................... 81 5.1. DEVELOPING AND EXPANDING THE LENDING AND INVESTING NETWORK ...................... 81 5.2. POLICY AND REGULATORY IMPROVEMENTS TO ENABLE ACCESS TO ALTERNATIVE CAPITAL ............................................................................................................................. 83 5.3. FINANCIAL LITERACY AND ALTERNATIVE FINANCING AWARENESS PROGRAMS ............. 91 GLOSSARY OF FINANCIAL TERMS .................................................................................. 93 P a g e | 5 1. INTRODUCTION 1.1. Background Micro, small and medium sized enterprises (MSMEs) are the backbone of most economies in the world. In this region, they account for 96 per cent of all enterprises and between 50 and 85 percent of domestic employment outside the agricultural sector in ASEAN Member States (AMSs). Compared to the larger firms, MSMEs have long been significantly under-served financially, with very limited access to the traditional funding from formal banking institutions. Some 85 per cent (or 365 million to 445 million) of MSMEs in emerging markets have suffered from credit shortage, estimated in the range of US$2.1 trillion to US$2.5 trillion within the developing world. Of this, 45 per cent (US$900 billion to US$1.1 trillion) is estimated to occur in East and Southeast Asia. One of the challenges in MSME financing is that their financial requirements are too large for microfinance, but are too small to be effectively served by corporate banking models. Another factor that limits MSMEs access to credit is their large geographical dispersion around the region. ASEAN's growth story thus far has been centred in its capital cities and financial centres such as Bangkok, Jakarta, Kuala Lumpur, Manila, and will likely revolve around developing capitals of Ho Chi Minh City, Naypyidaw, Phnom Penh and Vientiane as well. While 13-22% of MSMEs are still concentrated in the capital cities, the remaining are fragmented across other cities in the rest of the country. These 'secondary' cities play an equally important role in contributing to the country's economic growth and development. The lack of access to financing is constantly cited by MSMEs as one of the main barriers to growth. With MSMEs still considered by commercial banks and traditional financial institutions as risky and costly to serve, they remain underserved when it comes to basic financial services. Ensuring improved and adequate access to finance for MSMEs has long been a concern in ASEAN hence the directive of the ASEAN Strategic Action Plan for SME Development 2016-2025 to encourage greater access to more diversified sources of financing. An ancillary goal to improve financial inclusion and literacy becomes imperative in order for MSMEs’ increased engagement in the financial system. Indeed, financial inclusion is one of the three strategic, finance-related objectives in the “AEC Blueprint 2025” which is an integral part of the ASEAN Community blueprint “ASEAN 2025: Forging Ahead Together”. Such inclusion is to be achieved through expanding the number and scope of financial intermediary facilities to benefit a wider circle of underserved communities, including MSMEs. Several key factors impede MSME lending and results in poor financial inclusion of MSMEs: P a g e | 6 i. Low MSME coverage by credit bureaus/registries increases the cost of MSME credit risk assessment ii. Inadequate reach limits traditional banks to service MSMEs in the physical and digital spheres iii. Internal banking regulations dictate higher risk weights to MSMEs loans which in turn raises lending costs iv. Lack of cash flow visibility compels traditional banks to adopt strict collateral- based credit risk models which hinder lending to MSMEs without collateral v. Information asymmetry between demand and supply sides An analysis of individual countries in ASEAN reveals that the support MSMEs receive from financial institutions to help finance their businesses does not reflect their contributions to their country's GDP and employment, despite being the critical drivers for growth. With the exception of Thailand, MSME loan volumes in the region are less than 60% of their contribution to GDP, and constitute less than 20% of total loans. This actually presents a sizeable opportunity to alternative financiers in the MSME market segment as well as an untapped resource for the MSMEs with regards to their financial needs. Currently, there is very limited information tailor-made to MSMEs in their search for, and access to, investment finance in ASEAN. Of the available information, the focus is largely on the traditional sources of finance on the supply side. There is virtually no information on alternative sources of loan and equity funding potentially suitable to the financing needs and requirements of the regional MSME. Additionally, no information (such as guidebooks and checklists) exists on how, when, and where ASEAN MSMEs can access alternative sources of finance. 1.2. Types of Alternative