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Developing New Models for Associative Credit in Colombia

Disruptive Innovations

IC Fundación is a corporate foundation that was established in 2010 by IC Constructora and other allied companies, with the objective of generating positive social impacts in vulnerable communities by supporting the development and consolidation of associative companies. At the Foundation, we believe that partnership is a key element for generating sustainable economic growth and building social fabric in vulnerable communities.

After evaluating the needs of different associations throughout Colombia, we found that many associations, despite having commercial experience and active businesses, potential for growth, and administrative and business capacity, were not eligible for credit from traditional banks. In general, this is because the associations do not have credit experience or real collateral to support the credits. Furthermore, we found that the amounts required by these associations were relatively low, which was not very attractive or profitable for a bank or an impact investment fund, since the interest they could receive does not cover the costs associated with the credit assessment process or the implicit risk in this type of business in remote rural areas of the country.

What is the support model?

Bearing all this in mind, IC Fundación structured a support model for associative companies based on three main actions:

1. Helping organizations understand their business or restructure it in the case major changes are required to ensure the sustainability of the business. It is very common for us to find organizations that:

a. do not understand their business, or are unsure whether it is profitable or not. The most important thing for IC Fundación is that the leaders and partners of a community enterprise understand the business in which they are involved; that is, they are clear about their costs, expenses, key factors of competitiveness and profitability, how the market works, what their capital requirements are, etc. This is because in many cases, when they understand their business, partners are able to make decisions to determine the direction that they want their company to go.

b. does not have the administrative capacity to manage the credit. Being able to keep a business running does not necessarily mean that you have the ability to manage credit. At IC, we support community enterprises in the process of keeping their accounts transparent and organized. We suggest implementing accounting software if it will be of use to carry out accounting, but if it isn’t, we support organizations in the implementation of accounting records and control systems that make it possible to trace the flow of money within the organization. If they have this, they can know where the money is at any time, where there are more risks, and clearly define the capital needs of the business.

c. have good businesses, but they have no collateral. In this case, the best guarantee we can have is to truly understand the business that we are financing and to know the people we are supporting.

2. Providing financing tailored to the needs of community enterprises. Every business is different and has different financing needs. That is the reason why, at IC Fundación, we adapt the credit to the needs of the community enterprise and to the cash flow of each business. This can be done initially if we really understand the business that we are going to support, and secondly if the internal processes of the Foundation have sufficient flexibility, so that different rates, amortization times, grace periods in interest or Capital, etc. can be set, thereby ensuring that the credit helps the business, and does not become a burden.

3. Accompanying the community enterprises in the implementation of their business projects. Experience has taught us that it is necessary to accompany the associations in the implementation of their business projects with credit. We understand our role of accompaniment, and how to help them to do, instead of just asking for accounts. Accompaniment is carried out for the critical issues identified during the business evaluation process (business, administrative, and governance issues, etc.).

IC Fundación does not seek to be competition for traditional banks. On the contrary, what we seek is that, after a process of growth and consolidation thanks to our financial and business support, community enterprises will be eligible for credit from traditional financial services. One of our objectives is to achieve the "financial inclusion" of associative companies with high social impacts. The generation of social and economic impacts requires innovation in the development of credit and financial models that adapt to the context, culture, and business needs of rural associations and enterprises.

Case Study of Support Given to Association of Cacao Producers in Tumaco

In mid-2015, IC Fundación received a request for support from Chocolate Tumaco, an association of cacao producers in the municipality of Tumaco, in the department of Nariño (On the Colombian Pacific coast, near the border with Ecuador). At that time, the international price of cacao was more than $3,000 per ton, Tumaco's cacao was beginning to be recognized for its excellent taste and organoleptic quality, and there were customers in Europe who wanted to buy cacao from this company. However, it did not have the money to be able to make an export shipment without altering its sale commitments in the local market or the operation of the business. In Tumaco, the producer is normally paid as soon as the cacao is bought. To carry out the export, the company needed:  1.) at least one month to collect the volume required by the customer (25 tons), 2.) money to cover the costs of export logistics, and 3.) to wait for at least three weeks after the cacao left Tumaco to receive payment. That is, in order to embark on an export process and not affect its normal operation (payment of wages, purchase of cacao, etc.), the company needed to allocate significant capital (which it did not have) exclusively to that activity for a minimum of two months.

IC Fundación evaluated the business, saw the commercial opportunity, and the social impact that the company was generating in the municipality (it regulated the purchase price given to the producers, who previously received what the intermediaries wanted to pay) and, taking into account that there were strategic allies supporting the company, decided to support and finance it. In this process, we counted on:

1. A commercial ally (Mariana Cacao Export) accompanying the process of negotiating the price and commercial conditions of the export, the purchase process in Tumaco and the export logistics.

2. A technical ally (Colombia Responde N/S) accompanying the company in technical and administrative aspects, which made it possible to trace the purchase and sale of the cacao, and to be clear about which producers they were buying from, the quantities, prices paid to producers, etc.

In this case, the financing of cacao exports generated positive impacts, as it opened a market that allowed the association to pay better prices per kilo to the producers and generated surpluses for them, which could be reinvested in the business (to increase working capital or for purchases of productive assets) and in technical assistance for producers.

The decision to finance the export was made taking into account several conditions:

  1. We should all invest resources. IC Fundación financed 70 percent of the value of the export. The community enterprise had to provide the remaining money.
  2. The first money transfer would be made in accordance with a purchase schedule.
  3. For the following money disbursements, a committee (where the technical and commercial allies would participate in addition to the community enterprise) would send a certificate confirming that the money sent for the purchase of cacao corresponded to the level of cacao inventories, and that the cacao in inventory had the quality required for export.
  4. When the cacao was taken from the warehouse to the port, the cargo had to be insured with the Foundation as the first beneficiary.

There were many difficulties in the first export, primarily because the climate delayed the drying of the cacao. Despite the difficulties, Chocolate Tumaco’s first export financed by IC Fundación was a success. Surplus was generated, which allowed the capitalization of the company and increased the working capital available for the purchase of cacao, while generating confidence in the producers and in their association. People began to believe that they could export directly and take advantage of overseas trading opportunities. Since then, IC has financed the export of five containers of cacao from Tumaco, thereby helping to strengthen the organization, and Chocolate Tumaco has positioned itself as one of the most important cacao marketers in Tumaco, regulating the purchase price and thus ensuring that their producers receive a fair price for their product.

Results and Next Steps

IC Fundación currently supports and finances 15 community enterprises, which is associated with more than 4,351 families of producers in eight departments of the country. These community companies produce strawberry, coconut, rice, plantain, honey, etc. With them, credit agreements have been signed for more than COP $2.3 billion. These resources, plus the business support, have given these families the possibility to be part and owners of solid community enterprises and to have reliable sources of income. Although the results of IC’s follow-up have been very positive, there is still a long way to go to strengthen the community enterprises and consolidate the benefits received by the communities.

Several lessons have been learned along the way: 1.) It is necessary to work in alliance (with commercial and technical allies, etc.) and as peers with the organizations. 2.) The credits must be tailor-made (and in order to tailor them, it is necessary to understand the organization in detail). 3.) Credits alone do not make changes -- it is necessary to provide business support. 3.) If there is no organized community base, the associative business will fail sooner or later. 4.) The development of entrepreneurial skills in local leaders must be strengthened. 5.) It is necessary to work on producer-level financial education programs and to promote savings and investment. 6.) It is necessary to prepare the organizations so that they can receive and manage credit. These lessons are defining the path that IC Fundación will follow in order to continue innovating and implementing schemes to support associative business development in Colombia.