What PlusPlus can do for SMEs
Written by Hans Kramer on 17 February 2022
Suppose you have your own business somewhere in Asia, Africa or Latin America. A well-run business in the agricultural sector, with several employees, reliable suppliers and regular customers. Why would you turn to a platform all the way in the Netherlands? Our Investment Manager Lars explains...
Lars van Doremalen (on the left in the photo) is an experienced investment manager. Having worked for various multinationals for over 10 years, he has extensive financial knowledge and experience with sustainability. After volunteering in Bangladesh he decided to focus entirely on entrepreneurs in developing countries. First at Solidaridad and for the past 2 years for PlusPlus, where he searches for entrepreneurs with a lot of growth potential and enthusiasm.
What kind of companies do you get excited about?
"Companies that not only have growth potential, but whose growth also creates impact for many people. For example by job creation. Unemployment is high in many developing countries, especially among women and young people. When a growing company creates new jobs, especially for these groups, it offers them a stable income to provide for their families.
In addition, these companies are part of a larger value chain, in which many more people are connected. When the company starts to grow, the entire chain is boosted. That's why PlusPlus looks carefully at who are all involved and benefit from that growth. Does the company source from large plantations or small-scale farmers around the poverty line? Do they buy at a fair price? And do they also invest in their suppliers by training them, for example in more sustainable agriculture? Because if so, the growth of the company will have an impact for many. That is what is important to PlusPlus."
Why do these companies come to PlusPlus?
"In order for a company to innovate, become more sustainable or scale up, financing is needed. For this you can go to a bank, but most banks avoid risks. And companies in the agricultural sector, whose production is influenced by uncertain factors such as the weather, have a higher risk. Especially in developing countries, where the impact of climate change is high. That's why banks ask for securities, to ensure that they will get their money back. In practice, the securities they ask for are very high, sometimes up to 300% of the value of the loan. That's just not feasible for a small or medium-sized business, they don't have that.
PlusPlus does not ask for securities from our entrepreneurs. That's a conscious choice, to give the companies that cannot meet that requirement -and therefore can't get financing anywhere else- also a chance to grow."
But doesn't PlusPlus need security?
"A company has to demonstrate that they are able to repay the loan. PlusPlus relies on a good analysis of a company's plans, goals and financial status. We do due diligence and usually visit the company. If all that is in order, we assume that they will be able to repay their loan. Moreover, PlusPlus deals with relatively small loans. Recovering collateral is then more expensive than the loan itself. And we want to challenge banks to lend without securities, because asking for collateral of 300% is crazy."
Sounds favorable for these companies. Are there any drawbacks?
"Local financing is always better in theory. Because we are under European legislation, companies have to go through many more legal checks to work with PlusPlus. But for many entrepreneurs, PlusPlus is their only option, so there is still a lot of demand for a PlusPlus loan.
Companies can take out multiple loans via PlusPlus. Once a business is approved, an agreement is signed in which we agree on a total amount. That amount depends on their financial situation, because they have to be able to pay it all back. We also look at whether they have other loans because, for example, we don't want them to repay one loan with the another. It should remain healthy. But if the company pays back their loans well, then they can get more. Also, the total amount agreed upon is often broken down into several smaller loan sizes that are offered on the website. That's the reason you see some companies asking for more loans on the websie. We do have a hard limit of 750,000 euros up to which we help companies. That way we force ourselves to always stay focused on small and medium-sized businesses.
A loan from PlusPlus is not free for entrepreneurs. Because we believe that free money can disrupt markets, they have to pay a one-time fee of 7% on average for using the platform and to cover (part of) the costs."
What are the loans used for?
"Most companies need working capital, usually to buy raw materials to process and sell. The money only comes in after the sale, but they need money earlier to pay the farmers. PlusPlus offers working capital to bridge that period, until the revenues come in. These working capital loans are often short-term and have less risks because they ensure organic growth. When agreeing the payment term, the company can specify when exactly they need the funding, for example in the harvest season.
Loans for capital investments, like new machinery, often run a little longer, because the costs of the investment have to be recouped. Many banks do not want to finance this at all, so that's where PlusPlus has additionality. With a capital investment there are often several payment moments: for the down payment, transport, delivery and installation of the equipment. That requires expenditures to be made long before anything has been delivered. Hence, sometimes 3 tranches are needed for one capital investment.
These types of loans have a little more risk, for example because equipment is delivered late or production does not increase as much as expected, which is why we do these loans less often. But for growth, this is important. A good example is our entrepreneur Divine Industries, which used a loan to purchase a new machine for pasteurizing pineapple juice. That new machine is already generating additional sales, which is used to pay back the loan."
What do you think of the companies PlusPlus is working with so far?
"The portfolio of PlusPlus shows a nice diversity of companies, both in terms of risks and impact they make and in types of companies (buyers, processors, producers etc.). They are almost all local entrepreneurs and even include female entrepreneurs, although we would like to see more of them.
Very small businesses remain difficult. They often have limited administration, so it takes a lot of work to go through all the procedures and to do business with them. But you really make a difference with these kinds of companies, so we would like to be able to help them more. In some cases we would also like to help companies in an advisory capacity, for example in the area of financial administration, where advice could make a big difference. Unfortunately, PlusPlus doesn't have the time or resources for that right now.
The repayment of the loans is also going well. Something can always happen that makes it impossible for a company to repay the loan, and that's something we also expect at PlusPlus. But so far, there have only been 3 delayed repayments -with legitimate reasons- and all other loans have to been repaid."
Are you already seeing an effect of PlusPlus loans for businesses?
"There is clearly growth of the companies we works with. A nice example is Sereni Fries. This company has grown tremendously, with more employees, new orders coming in, great new customers and 30% more sales. Soon they won't need PlusPlus anymore, then they can get financing from local banks and investors. And that's exactly what we want with PlusPlus: to enable companies to bridge the funding gap so they can eventually access local funding and continue to grow."