Today, an entrepreneur asked me to solve the working capital problems of his grain aggregation business.
You may find my email response to him useful:
You have the most common, and most life-threatening, business problem in Africa. It’s like pushing a boulder up a hill, if the boulder grew bigger the higher you pushed; working capital is not like startup capital. The more successful you are, the more you grow, the more you need.
Here are the potential solutions:
Better terms
Get shorter payment terms from your buyer (120-day payment terms are obscene and a huge red flag that the buyer isn't managing their cash well and you risk getting paid never)
Find a better buyer.
Pay your way out of the problem
Work with an invoice discounting company like IMFact, FACTS or YoFinvoice. This costs ~3-7% per month on the value of the invoice. Purchase Order financing is available in some markets, but I don't know of it in East Africa.
Line of credit. For this, you will need collateral in the form of land or cash in East Africa. Alterfin, Rabo Foundation can use alternative assets as collateral.
If you don't have collateral, perhaps you have a friend who will lend you the money due to your personal relationship.
Have a massive social impact that USAID or Gates Foundation will give you a loan guarantee (very rare and costly to acquire the guarantee; you will still need to pay interest)
Band-Aid solutions (that don’t address the root cause)
[The entrepreneur suggested upgrading their machines so they can export.] Better cleaning machines could help you get paid in USD for export. But you still have the same working capital problem. Few capital providers will fund machinery for a business that has an underlying working capital problem.
Raise Equity (expensive solution for working capital as you will have to raise more equity when you outgrow your working capital)
Free up money elsewhere in your business. For example, Asset Finance for your vehicles is easier to obtain than working capital.
Structural Change
Become vertically integrated and mill your own flour. Sell to small shops on a cash basis.
Develop a complimentary business that has a negative cash conversion cycle (CCC). Insurance is an example: you collect premiums today and payout claims months later, if at all. Warren Buffet famously used this to finance (part of) Berkshire Hathaway’s investments. Equipment leasing, Subscription, and Event Organizing are other negative CCC businesses. Marketplaces like Amazon.com collect money today but often take weeks to pay the merchants. Amazon has a CCC of -27 compared to Walmart, whose CCC is 4.
Pay farmers on a base plus bonus schedule (like cooperatives do for tea farmers) so that you only pay the full bonus once you receive payment from your buyer.
Create a premium grain product that buyers must pay for in advance. (We have one entrepreneur who gets paid for their agriculture exports before they even ship them because the product is in such high demand.) I can imagine a premium aflatoxin-free flour that sells to rich households—who wants to stunt their kids with aflatoxin?
Create a psychological benefit of pre-paying. Our client Agro Supply sells seeds to smallholder farmers on layaway, like a savings plan. They collect the money in advance, buy the seeds from the supplier and then deliver the seeds to farmers, for a negative CCC.
Go into a different business with a negative CCC. We work with a dairy company. The milk co-op delivers to our client daily but the client pays the dairy co-op at the end of the month. Crucially, this dairy company doesn't sell to supermarkets that pay in 60 days, but instead to local shops that pay cash, resulting in a negative cash conversion cycle (CCC).
The easiest option is to negotiate better terms/find a better buyer. For the price of paying for working capital ($500k * 20% interest = $100k per year) you could hire several sales reps to develop relationships with better buyers so you are not at the mercy of one buyer and you have negotiating leverage.
The strategic solution is to pivot into a business with a short/negative CCC.
Not all great companies have favorable working capital fundamentals. Tesla, biotech companies, movie studios, Apple, oil drilling all require LOTS of working capital. However, note that these companies have higher margins than grain aggregation.
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14 solutions to working capital in Africa
Share this post
Today, an entrepreneur asked me to solve the working capital problems of his grain aggregation business.
You may find my email response to him useful:
You have the most common, and most life-threatening, business problem in Africa. It’s like pushing a boulder up a hill, if the boulder grew bigger the higher you pushed; working capital is not like startup capital. The more successful you are, the more you grow, the more you need.
Here are the potential solutions:
Better terms
Get shorter payment terms from your buyer (120-day payment terms are obscene and a huge red flag that the buyer isn't managing their cash well and you risk getting paid never)
Find a better buyer.
Pay your way out of the problem
Work with an invoice discounting company like IMFact, FACTS or YoFinvoice. This costs ~3-7% per month on the value of the invoice. Purchase Order financing is available in some markets, but I don't know of it in East Africa.
Line of credit. For this, you will need collateral in the form of land or cash in East Africa. Alterfin, Rabo Foundation can use alternative assets as collateral.
If you don't have collateral, perhaps you have a friend who will lend you the money due to your personal relationship.
Have a massive social impact that USAID or Gates Foundation will give you a loan guarantee (very rare and costly to acquire the guarantee; you will still need to pay interest)
Band-Aid solutions (that don’t address the root cause)
[The entrepreneur suggested upgrading their machines so they can export.] Better cleaning machines could help you get paid in USD for export. But you still have the same working capital problem. Few capital providers will fund machinery for a business that has an underlying working capital problem.
Raise Equity (expensive solution for working capital as you will have to raise more equity when you outgrow your working capital)
Free up money elsewhere in your business. For example, Asset Finance for your vehicles is easier to obtain than working capital.
Structural Change
Become vertically integrated and mill your own flour. Sell to small shops on a cash basis.
Develop a complimentary business that has a negative cash conversion cycle (CCC). Insurance is an example: you collect premiums today and payout claims months later, if at all. Warren Buffet famously used this to finance (part of) Berkshire Hathaway’s investments. Equipment leasing, Subscription, and Event Organizing are other negative CCC businesses. Marketplaces like Amazon.com collect money today but often take weeks to pay the merchants. Amazon has a CCC of -27 compared to Walmart, whose CCC is 4.
Pay farmers on a base plus bonus schedule (like cooperatives do for tea farmers) so that you only pay the full bonus once you receive payment from your buyer.
Create a premium grain product that buyers must pay for in advance. (We have one entrepreneur who gets paid for their agriculture exports before they even ship them because the product is in such high demand.) I can imagine a premium aflatoxin-free flour that sells to rich households—who wants to stunt their kids with aflatoxin?
Create a psychological benefit of pre-paying. Our client Agro Supply sells seeds to smallholder farmers on layaway, like a savings plan. They collect the money in advance, buy the seeds from the supplier and then deliver the seeds to farmers, for a negative CCC.
Go into a different business with a negative CCC. We work with a dairy company. The milk co-op delivers to our client daily but the client pays the dairy co-op at the end of the month. Crucially, this dairy company doesn't sell to supermarkets that pay in 60 days, but instead to local shops that pay cash, resulting in a negative cash conversion cycle (CCC).
The easiest option is to negotiate better terms/find a better buyer. For the price of paying for working capital ($500k * 20% interest = $100k per year) you could hire several sales reps to develop relationships with better buyers so you are not at the mercy of one buyer and you have negotiating leverage.
The strategic solution is to pivot into a business with a short/negative CCC.
Not all great companies have favorable working capital fundamentals. Tesla, biotech companies, movie studios, Apple, oil drilling all require LOTS of working capital. However, note that these companies have higher margins than grain aggregation.
Hope this helps.