In Barbados, there appears to be a general consensus that small businesses are vital contributors to economic growth in Barbados. According to a 2016 study of Caribbean micro, small and medium enterprises (MSMEs) conducted by the Caribbean Development Bank, the MSME sector contributes over 50% to employment and Gross Domestic Product in the Caribbean. There also appears to be widespread agreement that access to financing is a challenge in Barbados, despite the existence of a wide range of financing options.
Debt Financing from Traditional Lenders
Small businesses in Barbados have access to various forms of debt financing from the majority of financial institutions such as credit unions, commercial banks and finance houses. Term loans, in particular, are a very popular choice and are granted to finance activities such as start-up capital, expansion and the acquisition of fixed assets. The larger credit unions all have lending products designed for small businesses with interest rates at the time of publishing this article varying between 5.5% and 12%. Maximum loan values range from $20,000 to $50,000, and conditions vary.
The commercial banks have packages designed for small businesses that include products such as overdrafts, term loans and credit cards. Some banks offer both fixed and variable rate loans. Depending on the collateral provided, business owners can receive funding at rates as low as 5.5%, and depending on the amount borrowed a deposit may not be required. Most of the banks offer property loans/commercial mortgages where businesses can receive up to 15 years’ financing and borrow as much as $1.5 million to purchase land or land and building. The majority also provide overdrafts and lines of credit to help businesses manage daily payments and mitigate unforeseen expenses. These facilities are usually granted for 12 months and have variable rates attached. All of the banks have business credit card products, providing business owners with a convenient, flexible and simple payment option. Credit cards also carry benefits like reward points, travel accident insurance, free skybox addresses and concierge services.
Trade finance is another form of debt funding that banks offer selectively, to help businesses with the movement of goods and services between countries. Some institutions also offer lease financing, providing quicker access to expensive equipment. Regular rental payments are made by the borrowing party to the finance company and a lease agreement can last for 5-10 years. Similar to banks and credit unions, finance companies offer an array of financing products including commercial and working capital loans, lines of credit, commercial mortgages and corporate leases. The requirements for financing from the above financial institutions include specific collateral, proper identification and proof of address. Applicants may also need to supply business registration and incorporation documents, bankers’ reports, financial projections and audited financial statements, or a business plan for new ventures. Depending on the product type and purpose, sale agreements, insurance documentation and invoices may be required.
Debt Financing from Alternative Lenders
There are organisations that target entrepreneurs who are unable to meet all of the prerequisites stipulated by the above conventional finance institutions. The Barbados Business Trust, for example, offers start up and expansion financing to young businesses (5 years and below). Businesses can access up to $25,000, the maximum term is 5 years and interest rates vary between 10-12%. Fund Access, a government-funded financier, provides finance bundles for the different types of small businesses. For example, the Business Boost package caters to start-ups, the Business Pro package is for professionals establishing or expanding their practices and the Business Facilitator package targets companies in the Retail and Distribution sectors. Businesses can borrow from $1,000 up to $150,000 and interest rates are between 6% and 7.5%. Tenors range from 1 to 15 years and Fund Access also offers moratorium periods, allowing borrowers to suspend payments from a month to a year. Downpayments are not typically required but guarantors are needed.
The Cherry Tree Trust is a private charity focused on promoting job creation by providing small businesses with funding for launch or expansion. It specifically targets those businesses that were unsuccessful in their attempts to receive funding from traditional/mainstream financial institutions. Once approved, beneficiaries can borrow up to $15,000 (start-ups) or $25,000 (existing businesses) for 5 years; no security is required and interest is fixed at 5%. In order to qualify, annual revenue cannot surpass $500,000 and there must be no more than 10 employees at the company.
Another interesting alternative is Carilend, which was was launched in Barbados in May 2017 and is the first finance company to provide peer-to-peer lending in the Caribbean. This online lending platform matches loan-seekers directly with investors to lower costs and provide better rates to both borrowers and lenders, making the loan process quicker, cheaper and more convenient. Interest rates are determined based on individual credit scores and loan amounts currently range from $2,000 to $10,000. Repayment periods are from 1 to 5 years and requirements include having a regular income source, good credit history and being between the ages of 21 and 65.
Venture Capital and Angel Investing
Equity Financing – where businesses offer a proportion of ownership in exchange for capital – is another funding option in Barbados and other that the entrepreneur’s own capital, the main types include venture capital and angel investing. Venture capitalists manage business investment funds from various sources whereas angel investors dedicate their own wealth and usually provide guidance and mentorship.
The Barbados Business Enterprise Corp (BBEC) manages 2 venture capital funds – The Barbados Entrepreneurs’ Venture Capital Fund and the Barbados Quick Response Revolving Seed Capital Fund. BBEC invests up to $500,000 in equity financing, and applicants are required to have a strong competitive advantage and a capable management team in place. These venture capital funds cater mainly to sectors that are deemed critical to Barbados’ growth such as Creative Industries, Education, Information, Communication & Technology, Health & Wellness and Renewable Energy.
The Barbados Investment Fund (BIF) is another venture capital fund. It is managed by the Caribbean Financial Services Corporation and co-funded by the Central Bank of Barbados, and provides equity financing from $100,000 to $1 million. The BIF targets small businesses in the tourism, agro-industry, manufacturing and other sub-sectors. The funding is largely provided to assist with expensive capital expenses such as real estate and equipment.
The Barbados Entrepreneurs Foundation formed the Trident Angels network which is a group of successful business leaders that wish to invest money and experience into initiatives with potential. They target entrepreneurs facing difficulty with receiving financing because they are unable to provide the financial institutions with sufficient security. The Trident Angels can inject sums from $10,000 to $2 million and some decide to invest funds at different phases when milestones have been achieved. Existing or aspiring business owners can also receive angel investment from their family, friends or persons in their network.
To further narrow the funding gap, the Government of Barbados has sponsored and partnered with organisations to provide small businesses with financing via debt, equity, grants and credit guarantees. The Enterprise Growth Fund Ltd. (EGFL), for example, is a partially government-funded initiative that provides debt and equity financing, advisory services and technical assistance to small local businesses. This organisation manages a group of sectoral funds that gives development financing to businesses in specific areas including tourism, agriculture, innovation and energy. Depending on the fund and loan purpose, applicants can access over one million dollars in financing. EGFL also manages a Trade Receivables Liquidity Facility that permits small businesses to receive timely payment for goods and services, procured for a statutory corporation or government ministry, on time.
The Central Bank of Barbados offers financing and guarantee schemes that aim to increase employment, development, productivity and foreign exchange in the MSME sector. Examples include the Industrial Credit Fund, Tourism Loan Guarantee and Enhanced Credit Guarantee Fund (ECGF). The ECGF was created by the Central Bank in conjunction with the Inter-American Development Bank to cater to those small businesses that lack sufficient capital to secure funding. This fund secures up to 80% of loans ranging from $20,000 to $2 million, with a maximum repayment period of 10 years. There is an annual charge of 0.75% attached to the facility and the guarantees are provided through authorised finance companies that include the major commercial banks, finance and trust companies. The ECGF is available to businesses with less than 200 employees and $20 million in annual sales, and require funding for purposes such as the acquisition of land, buildings, machinery and equipment, expansion of infrastructure and implementation of new technology.
Grants are another source of funding available to small businesses, and institutions such as the Central Bank and EGFL provide grants under some of their funds and schemes, for example the Industrial Credit Fund, Agricultural Development Fund and Energy Smart Fund.
Small businesses can also raise funds via crowdfunding – an unconventional and increasingly popular means of financing where money is raised from small amounts of contributions from a large number of persons. It has been estimated that in 2015, over $34 billion was raised worldwide via crowdfunding. Social media platforms and crowdfunding websites – Gofundme, Kickstarter and Indiegogo to name a few – make it easier for business persons to access extensive numbers of potential investors across the globe. According to Forbes magazine, crowdfunding is likely to become the next huge investment trend because it is convenient, low risk, helps to validate a business idea and is a great way for businesses to advertise .
The root of the access to finance ‘problem’ may be a mismatch between lenders and borrowers
In Barbados, small businesses have access to varying methods and types of financing that can help convert a business idea into a reality and support the development and growth of existing ventures. The Caribbean Development Bank study noted that there are both supply and demand challenges affecting access to finance in Barbados. The elevated risk associated with starting new businesses acts as a deterrent for many financiers, and small businesses and entrepreneurs may not be aware of the range of financing options available. It is possible, therefore, that small businesses may not be aligning the level of risk associated with their project with financiers that are prepared to take on that risk.