Starting a manufacturing business, especially one in the food sector, can be intimidating because of the associated costs. This however doesn’t have to be the case. With the right financial solutions, manufacturers can acquire new equipment, modernize their operations, or retool their factory while preserving liquidity to run daily operations.
FBA: Gentlemen, welcome to Food Business Africa Connect. I would like to request each of you to introduce yourselves, the company you work for, and what it does.
BENARD ODOTE: My name is Benard Odote, the Director, Strategy and Partnership at RentCo Africa, a structured finance and an independent leasing company. We work with organizations to help them acquire assets without any upfront capital outlay so that the assets can work for them, and they can preserve liquidity.
We offer 100% financing and have other financing structures such as trade finance and working capital financing to help organizations to acquire their capital-intensive inputs such as raw and packaging materials. RentCo Africa also offers other off-balance sheet solutions, such as retailer financing and logistic solutions financing, that are completely off-balance sheet to customers. We basically help organizations to be able to acquire all their needs now and pay overtime while they are making money out of their inventories or out of their equipment.
ANTONY MUTWIRI: My name is Anthony Mutwiri, the Area Sales Manager at Bühler, a leading food, animal feed and advanced materials company. Every day within Africa you must encounter products that are manufactured on our equipment. They could be maize meal, porridges or even biscuits and coffee. We are active in various value chains in Africa but are mainly involved in the production of food and feed. It’s nice that we can have this conversation about the opportunities that lie in manufacturing, industrialization, and retooling of factories within Africa and how we can be able to grow the continent in terms of food and other related items.
FBA: You recently signed an MoU to work together. Could you give us some details on the kind of partnership that you signed?
BENARD ODOTE: Agriculture is the dominant sector in Africa and even during Covid-19, it is the only sector that did not go down – people continued eating and probably ate even more.
As we seek to grow agriculture, we need to be able to carry out value addition of our produce and to achieve that we need more equipment. But if you look at the economic situation in African continent, the upfront capital outlay is a constraint not only for the small companies but also large organizations.
This makes it very difficult for companies to invest in new equipment, retool their factories or get new technology like new software for automation. Partnering with Bühler gives us access to provide financial solutions to the industry from the small to the large player.
The beauty of food products is that they always have market. You see a mill starting today and in three years it is a mega establishment. Because of the future guaranteed cashflows out of the food industry, it is easy to put financing for equipment access for organizations because we know the equipment will repay itself.
ANTONY MUTWIRI: Going into food processing is not a small enterprise. It is capital intensive, and we realized a lot of people are not able to grow because of the lack of capital. The traditional financing that is available from the banks in Africa requires businesses to have track record in terms of being able to meet the requirements for funding.
When you are trying to meet an increase in demand for your products or are trying to bring in new technology to let’s say introduce a new product, this kind of financing requirement usually ends up being problematic for a lot of the players.
A lot of our customers and even new players come to us and always keep saying that financing is a problem. This is what informed us to look at leasing as a model that can be used to meet this financing gap.
If we have a player who is willing to own the asset and manufacturers who are coming into the industry can use the tool to add value to their commodities, then it would be a win-win. We approached Rentco and they bought the idea. That is basically the foundation of the kind of MoU we formed: closing the financing gap in manufacturing and making sure that we are be able to spur availability of this solutions in the market.
FBA: You have talked about working capital and off-balance sheet financing. Can you elaborate on these two concepts?
BENARD ODOTE: To give you an example, any raw material that you are importing, you must pay for it in advance, either fully or partially. Then you have pay for logistics and taxes before the product even gets to your factory. You the process it and have a conversion period before you are paid by your customers. So, you have 120 days where you will incur processing expenses before you are paid for the first bale of your processed good.
To address this problem, most companies import in bulk and end up having 6-months’ worth of raw materials on their balance sheet, which puts a strain on their finances. So, we step in and purchase for them. The processor identifies the supplier, does all the procurement and quality parameters while we – working with a collateral manager – finance the purchase and keep the raw materials either in our warehouse or the processor’s warehouse depending on storage options we have, and only hand over the stock to the processor as per their production schedule.
So most likely if you produced today and sell it in 3 days and you pay us in another 30 or 60 days, we will have extended your liquidity, made your balance sheet lighter, and most importantly, we have assured the processor of 100% fulfillment.
With our solution, your customers are happy, you are missing no orders, you are missing no revenues, and you not going out of pocket before you get paid.
FBA: This sounds like a very good concept. Do you think processors have adequate knowledge of this kind of financing and are there challenges that you experience as a provider of such solutions?
BENARD ODOTE: I think information is still very scarce on these finance structures and the benefit they offer, since traditional financiers like the banks are focused on the more common financing products and have probably not gone out of their way to push these other solutions.
Most organizations opt to rather have 6 months of raw materials supply, which exposes them to supply chain risks – almost 80% of businesses that collapse, it’s a supply chain problem – either inventory that is too much and there is no cash to pay suppliers or there is no cash to import new materials or pay statutory duties. When cash disappears, a divergence between a physical and financial supply chain occurs. The information that we need to pass out there is that there must be a convergence of the physical and financial supply chains. If the convergence is well mixed, you get to extend your liquidity and are then able to always meet market needs and fulfill your customers’ orders.
FBA: Expanding the conversation a bit, what has been the impact of Covid-19 on supply chains and what opportunities do we see coming out of the pandemic in the food manufacturing space in Africa?
BENARD ODOTE: I see Covid-19 as a blessing in disguise. Companies are now starting to consider sourcing and manufacturing their products either locally, or regionally, or near shore.
Even in financing and logistics management, if you are sourcing from outside the country, you start thinking if you can repatriate capacity back into the region, so that you can now supply East Africa out of Kenya instead of out of Egypt or out of China.
We must finance locally and come up with new financing solutions to support local value chains and further, reorganize logistics to ensure that fulfillment is met, and inbound cargo is also not distracted. The pandemic is a wakeup call to any country and to all the continents. I believe because it has been a harmful experience, we should take the positives out of it and implement as we go forward.
I believe value addition should go hand in hand with the general economic development. I know a lot of people want us to add value to locally grown coffee but then I ask you, who will consume it? That is also an important mix that we must get right.
We should do quite a bit of mechanization. We should increase exports and ensure that we are not importing anything that is being produced locally. That’s where I see these opportunities. We should create some sort of a consortium led by financiers and anchor corporates to create a significant movement of value within countries and the continent.
I am a champion for diversity and inclusion. Anchor corporates can support a program of diversity and inclusion within value chain programs by backing the SMEs that supply them with inputs. With an anchor corporate, SMEs can access capital at the rate of the anchor corporate, which makes credit cheaper for them. Looking at both inbound and outbound value chains, anchor corporates can unlock quite a bit of financing for SMEs without them having the liability or the obligations of repayment risks.
ANTONY MUTWIRI: Covid-19 was an eye opener for a lot of African governments in terms of the need to value add locally grown products. I’d say that it is one of the most positive events for the African continent – countries like Ghana and Ivory Coast have started looking at the value addition of cocoa within their countries. I think it’s a trend that we will continue. If you’ve got coffee, for example, growing locally in your country, value add it before you ship it out. There are immense opportunities within the entire African continent to go into manufacturing of food products at the end of this pandemic.
The role of government is in policy development and in developing the right economic environment for African entrepreneurs and manufacturers to firstly do business in a conducive environment and be able to add value to products therein. That said, we work within a global environment. If Africans must compete on the same standards of quality as all other global players, governments need to make sure that they create an environment for local manufacturers to acquire these world-class facilities to produce world-class products.
FBA: Are there other considerations around setting up a food processing plant that people should also consider before embarking on manufacturing?
ANTONY MUTWIRI: That’s a very good question – we have seen a lot of disaster projects because typically, a lot of investors only consider the cost of the equipment. A lot of entrepreneurs fail to consider the supporting infrastructure, especially when you consider investing in food manufacturing, because the food sector is quite stringent in terms of what you require to start production.
There are certain standards that you need to adhere to when starting out and at times the cost of setting up this infrastructure, labor, and the cost of raw materials will be higher than the cost of the core equipment.
We have seen projects where an investor has money to buy equipment but doesn’t have the money to finance the commodity. This is a disaster in waiting because business is always the commodity. It’s very important from the onset when they are doing the business plans, not only to focus on the equipment but everything else that will surround the process of getting the raw materials converted into the finished products.
FBA: How do we prevent these investment disasters from occurring?
BENARD ODOTE: The biggest cause of investment failures is lack of planning and planning is basically data. What business are you getting into? What is the market saying? What do we need in terms of the raw materials and packaging? What are the volumes looking like? What capacity is needed? Where is the location? Etc.
Once you plan properly you can prepare adequately for the needs ahead. The planning part is always the most important place to start. Before you go to any sourcing activity, whether you are sourcing for financing or for equipment or the whole infrastructure, you need to have enough data for each of those verticals. It doesn’t go wrong, it starts wrong.
FBA: Are there parts of an investment that can be leased, apart from the equipment?
BENARD ODOTE: There can be parts that can be leased. For example, we can look at a maize mill and unbundle the cost from the equipment to the infrastructure to identify what can be leased.
That is why it’s important at the planning stage to determine how to source financing and if you go the leasing route, we can have discussions on how to structure your finance model by looking at your cashflows and making sure you comfortable to repay.
ANTHONY MUTWIRI: To add on that, smaller companies need to take time to get good advice. There are certain concepts like vehicle leasing that they are beginning to be understood – many investors now know that with asset financing, they can get 90% asset finance of the truck and they do not have to spend 100% upfront to get the asset. This is the conversation we are trying to move, to say that if they understand on how to do that during their planning phase with the trucks, why not also acquire equipment through leasing and pay over a duration of time.