Long-term Credits

The long-term credits, also called "senior debts" are medium- and long-term financing tools with sometimes sophisticated characteristics.
Their term, remuneration and terms of repayment are determined at the time of the conclusion of the contract and their grant necessitates often that the borrower provides guarantees of repayment (see below).

Investment credit

Leasing

Investment credit

Principle:

Medium- and long-term loan granted to the enterprise in order to allow it to make a specific investment.
The number and frequency of the disbursements depend on the nature of the investment (only one payment for the purchase of a machine, several payments over the duration of the works for the building of a warehouse). The repayment of the capital occurs by instalments according to a plan agreed upon in advance.

Advantages:

The terms of repayment are generally speaking adapted to the investment contemplated. The grace period, in particular, allows the enterprise to postpone the first maturity dates up to the moment where the investment starts beginning profitable.
A clearly defined repayment schedule facilitates the cash-flow management.

Utilisation:

Acquisition of real property, capital goods, material, intangible assets (patent, market study), shares, etc.

Currency:

EUR, USD, or local currency.

Term:

3 to 12 years as a maximum, depending on the risk profile of the country, financial capacity of the enterprise, and economic lifetime of the investment.

Cost:

The interest rate asked by the moneylender is calculated based on a reference rate, for example the prime rate of a central bank, to which is added a percentage that will depend on the financial health of the borrower, nature of the activity and risk associated to the country in which the investment will take place.

Conditions of grant:

The financing institutions, whether public or private, condition the grant of a loan to the strict compliance of the conditions as to:

viability of the project: in order to get financing, the investment project should be sufficiently profitable;
ethical character of the project: the international organisations are paying special attention to the compliance of the work conditions, prohibition of child labour, environmental impact and positive impact on the community;
sectors of activity: some banks, MFI's and international organisations concentrate their action on a limited number of economic sectors (more information on the Internet site of the various institutions or with their local representation);
guarantees: the lender may ask guarantees that will depend on the nature and scope of the project (see the section on the guarantees).

Terms of repayment:

REPAYMENT PLAN:

The repayment plan is part of the credit agreement. Two options are offered to the investor:

constant instalments: the borrower reimburses the same amount over the term of the credit, but each instalment includes a variable share of interests and capital amount (capital repayment). The share of interests is very high at the beginning, and diminishes as the repayments take place;
constant amortisation (diminishing balance): at each instalment, the borrower repays a constant share of the capital. To this sum is added an interest calculated on the balance still due (the capital still to be repaid). The share of interest diminishes in the course of time, and with it the total amount of each payment.

In spite of its higher total cost, the enterprises generally prefer the repayment plan with constant instalments. Indeed to know that the paid amount will be the same every month facilitates the cash-flow management. Furthermore the first payments are less than with the constant amortisation, which reduces the repayment charge of the enterprise at a time where the investment is not yet fully profitable.

Grace period:

If the investment does not generate immediately income (building of a factory, installation time of a machine, ...), the borrower may profit by a grace period for the repayment of the capital, indeed the interests.
That period lasts generally 6 months to 1 year, but can in some cases reach three years.
If the grace period is also applied to the interests, the latter remain however due. They will be calculated by the bank and capitalised (added to the capital amount).

Development Finance Institutions

European bilateral institutions:

Most of the bilateral institutions intervene directly only within the framework of sizeable investments (more than EUR 1 million). They are often projects of infrastructure (roads, energy, telecommunications). When more modest projects are taken into account, the loans are:

granted in euros or in dollars;
sometimes repayable in local currency (which limits the exchange risk for the borrower);
for a term of one to twelve years;
limited to the private sector;
accompanied with conditions of nationality: one of the partners of the project should often be a European enterprise, indeed a national of the country from which the bilateral organisation depends;
sometimes limited to half the total cost of the project.

They contribute however often to the financing of more modest projects through direct aids or participations in the sector of microcredit.

European regional institutions:

The EIB only intervenes directly in ambitious projects (from EUR 3 to 5 million). However it grants credit lines to the commercial banks in order to allow them to participate in the financing of local projects carried by SME's (more details in the "country fact files").

African regional institutions:

The African regional institutions show also a preference for sizeable projects. Some are nevertheless financing less ambitious projects. Generally speaking the loans are:

granted in euros, dollars or local currency;
meant for the public sector as well as for the private sector;
accompanied with conditions of nationality: they intervene only inside their region;
for a term of one to twelve years, but for two exceptions:

The African Development Bank that proposes "projects-loans" repayable over a period of 50 years!
The Islamic Development Bank that grants loans repayable in 15 to 25 years (with a grace period of 3 to 7 years), that are not submitted to any interest but for a management fee of 2.5% per year. The projects located in the less favoured countries may obtain even more flexible terms and conditions.

Some institutions do not grant credit, but propose to reduce the repayment charge of the enterprises. Two systems are proposed jointly or separately:

interest rebate: the establishment takes charge of part of the interests. Either the enterprise will repay the intervention after the expiry of the loan, or it will be exempted from repayment (subsidy);
extension of the term of the credit: the cost of the operation will be repaid by the beneficiary after the expiry of the loan.

Multilateral institutions:

The DFI grants direct loans for amounts higher than EUR one million, and finances also smaller projects by means of credit lines granted to the local financial organisations. Through "SME Ventures", the DFIs will offer venture capital and technical assistance to SME's. In Africa this pilot-programme takes place in Sierra Leone, Liberia, DRC and in the Central African Republic.

Leasing

Principle:

Medium- or long-term contract entered into by the enterprise in order to allow it to make a specific investment.
The financial institution acquires the good and puts it at the borrower's disposal in return for a periodical rent including:

the repayment of the financed amount. This amount is obtained by deducting the residual value at the expiry of the agreement from the initial value of the good. Such residual value is determined at the time of the signature of the contract and will generally be lower than the actual value of the good;
interests calculated not on the total value of the good but on the financed amount.

Generally speaking the enterprise has a call option. At the expiry of the contract, it may:

exercise the option and buy the good at the price agreed at the time the contract was entered into (the residual value);
not to exercise the option and return the good to the lender;
sell the option to a third party that will exercise it.

The nature of leasing implies that the term of the contract is less than the lifetime of the capital good that is the subject-matter thereof.

Advantages:

The financing does not cover the whole value of the good, but only the difference between initial value and residual value at the expiry. The financed amount is hence lower than in case of a simple investment credit, which reduces altogether the interest charge and the amount of the periodical repayments.
The amount of the rents is constant from the beginning until the end of the contract, which allows the enterprise more efficient management of its cash flow.
Under some conditions, leasing is considered as a simple hire purchase and will not be taken up as debt in the corporate balance sheet, which will improve its credit profile.

Utilisation:

Acquisition of real property, capital goods, vehicles or material.

Currency:

EUR, USD, or local currency.

Term:

Less than the economic lifetime of the investment.

Cost:

The utilised interest rate is higher than for the long-term loan. However the interest is calculated only on the financed amount (the difference between initial value and value at the end of the contract).

Conditions of grant:

The grant of a leasing is submitted to stricter conditions than mere long-term financing, because the risks for the lender are higher.
Indeed the latter has not only to purchase the good, but also to resell it at the end of the contract if the entrepreneur does not exercise its call option.
The existence of leasing possibilities and their cost are hence strongly influenced by:

the nature of the concerned capital good, and in particular the existence of a second-hand market;
the economic and political stability of the country;
the profitability of the project, that should be higher than for a mere loan.
Beyond these particular conditions, most financing establishments check also the following elements:
the ethical character of the project: compliance of the work conditions, prohibition of child labour, positive impact on the environment and local community;
the sector in which the enterprise is moving: some banks, MFI's and international organisations concentrate their action on a limited number of economic sectors (more information on the Internet site of the various institutions or with their local representation).

Terms of repayment:

The repayment plan is part of the leasing agreement.
The amount of the rents is constant. Their number and frequency are determined at the time of the signature of the contract.