Working capital in East Africa is tough to get your hands on.
Umati Capital are looking to help, using technology to give credit where banks won’t, typically through giving food producers an advance when a big order comes in.
Ivan and I talk about how the legal environment means issuing credit is tough, how they evaluate their clients, and their vision to professionalise the supply chain across the continent.
It’s similar to the SME Financing episode with Bakka from Patasente, so give that a listen too if you find this interested.
I also should note that the only room available in their co-working space was quite echo-y, and so the audio quality for this interview isn’t great.
A couple of answers get lost and so I’m sorry about that.
Nevertheless, I hope that doesn’t detract from what is a very interesting interview
Here are some of the key quotes:
“My background is in banking”
I worked for Citibank across Africa. My co-founder has a background in Management Consulting.
“Banks require collateral to access capital”
This is a real blocker for small businesses looking to finance their operations. We’re using technology to open this up.
“We are working capital providers”
Our typical customers are food producers and we give them bridge financing when they receive an order.
“Supermarkets take 3 months to pay”
Imagine you are a cheese producer. You buy milk from farmers, turn it into cheese and sell it to a supermarket. The supermarket will accept it, but not give you the cash for 3 months. The farmers can’t wait that long and so the cheese producer has to find the money from somewhere.
“… and so a lot producers stay small”
If faced with the choice between small and regular payments or 10x sales through a supermarket, most will opt for the former as otherwise they’ll go out of business. They are thus bound to stay small.
“There’s a multiplier effect”
Not only does getting an advance smooth the operations, it also allows businesses to grow their business by constantly producing more of what they make.
“Cash flow based lending”
This is a concept in developed markets. If you can know with good probability that cash will come into a market then banks will lend based on that. That doesn’t happen with African banks, partly because there’s less trust that the courts will intervene.
“We make money by…”
Charging interest for the duration of the money being given. Typically this might be between 4-8% over 56 days.
“It might seem high”
Annualised you might think 24% annually seems expensive. However if access to this capital means you can grow your business by more than the interest you pay, it makes sense.
“There a multitude of checks that we make before releasing money”
When onboarding a customer we look into how many invoices have been unpaid previously due to quality issues etc. Then we look at the buyer and undertake a similar exercise.
“Buyers can find us pesky”
This is because we are holding them to account and essentially professionalising the industry. Our response is that professionalism yields a more stable supply chain.
“There are legitimate and illegitimate reasons for slow payment”
Sometimes the buyer is a middle man and so is waiting on their payment before passing it on. Sometimes though, buyers will choose to retain the capital within their business for other projects they are looking to finance.
“If the quality of the produce is bad…”
Then the responsibility sits with the producer. Umati Capital have a series of mechanisms whereby they reclaim the value in these instances.
“We’re going downstream”
The next phase of our growth is to work with our clients, and turn them into buyers. In the cheese example, it would mean providing finance for the milk producers.
“Technology is at the core of us scaling”
As we look to expand our offering to thousands of small-holder suppliers, we will use technology to keep things efficient and robust.
“Our money comes from…”
A variety of sources who are all looking for a short term return. These are institutional investors, high net worth individuals, and even crowdfunding..
“Clients assess us”
Small businesses may come to rely on financing from an organisation like Umati Capital.
“The market is huge”
Viewed as “SMEs who want credit” it’s massive. Agriculture concerns 25% of the economy and so Umati Capital has chosen here. Competitors have looked at other industries, but there’s place for plenty.
“Our vision is pan-African”
We see similar demand and demographics across the continent and so will be looking to expand our offering elsewhere.