PaygOps supports last-mile distributors’ scalability with a disruptive receivables finance mechanism
Solaris Offgrid pilots a true receivables finance mechanism in a new joint project with First Growth Ventures and Pawame. Eventually, this project aims at supporting last-mile distributors scaling their operations and providing investors with data transparency and standard formats to unleash new investment opportunities.
Consolidating their ongoing efforts to provide smarter financing mechanisms for last-mile distributors, Solaris Offgrid is pleased to announce their partnership with First Growth Ventures (FGV) and Pawame, aiming to demonstrate the process of financing last-mile operators through a true receivables purchasing mechanism that will benefit distributors and investors alike.
The challenge of debt matching
Digital finance in the form of pay-as-you-go (PAYGO) consumer credit has unlocked access to solar home systems (SHS), solar water pumps, clean cookstoves and other essential products to a whole new previously unbanked rural customer segment. However, despite the progress made in providing affordable energy and other amenities, scalability challenges remain due to a lack of standardisation and transparency in financing, which in turn makes fundraising slow, unpredictable and costly.
PAYGO platforms such as PaygOps have succeeded in enabling last-mile organisations to scale their operations, but distributors are still burdened with all of the customer repayment risks, and local companies are handicapped in their growth by lack of access to affordable and sufficient financing. One of the main reasons behind last-mile organisations finding access to finance difficult is that most times they don’t have enough of a track record to take on the large amount of finance needed to be cost-effective for investors and usually they can’t provide investors with up to the standard due diligence that would get them exposure to major financing institutions.
While the burden and credit risks are absorbed by last-mile distributors, debt investors, on the other hand, are presented with information in different non-standardised formats that require weeks to be cleaned and analysed in order to appreciate its value. The lack of formalised procedures also makes due diligence very expensive, which, combined with the time and cost that implies having to investigate everything about a company, make investors reluctant to bear such risk, or only incline to do so for tickets above 500k USD to justify the high due diligence costs still seen as inherent to the process.
A receivables finance mechanism to efficiently deliver credit to the market
For this pilot project, Solaris Offgrid (creators behind the platform PaygOps) is providing an open and interoperable platform to facilitate access to data, contracts and portfolios in a comprehensive manner, as well as the possibility to facilitate investors to directly invest in those contracts, through PaygOps last-mile operation management software.
"Paygo distributors, particularly local SMEs, find it difficult to balance the distribution, financing and servicing activities required under the Paygo model to scale sustainably. With this new facility, we aim to segregate credit provision by enabling investors to participate directly in pools of receivables. By streamlining financing in this way, we can facilitate 100s of distributors in reaching the [2bn] unbanked population in need of essential products." Siten Mandalia, Solaris Offgrid’s CEO.
As opposed to the current receivables financing or inventory financing system in the PAYGO market, in which the receivables usually act only as collateral, the new receivables finance mechanism devised by Solaris Offgrid allows investors to directly purchase the assets, thus it breaks down financing inefficiencies for the operator/distributor, Pawame, since they’ll be able to receive instant liquidity, as well as cut down the costs of data management and reporting, and reduce their credit risk.
“Access to working capital financing remains one of our sector's most significant challenges, and we're excited to partner with Paygops and FGV on this innovative approach to the issue. We look forward to significantly increasing Pawame's scalability through this opportunity." Maurice Parets, Pawame’s CEO.
In parallel, PaygOps provides the legal infrastructure and backup servicing necessary to decouple the default risk of the distributor and the end-customer. Thanks to such a transparent and open receivables purchasing facility, investors wouldn’t need to worry about distributors defaulting, and they would be able to purchase assets based on the risk of those receivables only, not relying on the distributors. That also means that investors wouldn’t need to spend time carrying out heavy due diligence on distributors in order to invest, as investors can instead focus on the underlying data, contracts and portfolios.
Likewise, this project represents value for money for investor partners, since it works towards unblocking a key bottleneck to revenue growth of PAYGO asset financing, unleashing the access to leases packaged into standardised receivables portfolios that investors may be able to purchase directly with full transparency. Since PaygOps provides open and standardised data, the due diligence is cheaper and other investment fixed costs are reduced, which allows smaller investments (as low as tens of thousands per project) to still be profitable, so investors can provide financing at lower rates to an aggregate of potentially smaller distributors.
“Managing the due diligence and complex debt structuring can be rather challenging for investors in the Paygo market due to the inconsistency of data formats we are presented with. Having access to standardised data and being able to exhaustively assess receivables portfolios from early-stage distributors through PaygOps' mechanism is a game-changer for investors in terms of costs and time-saving. We are excited to promote this project and looking forward to seeing how this is going to impact the whole industry." adds Maxime Bouan, Partner at FGV.
To understand the added value that this project means both for distributors and investors, have a look at these short videos:
First Growth Ventures, the seed investor to this project, is managing the advisory firm of Seedstars Africa Ventures, an early-stage venture fund supporting pan-African entrepreneurs across sectors and countries. FGV is working under USAID Power Africa’s POAP key mandate to support the structuring and implementation of a data-driven investment vehicle in the PAYGO sector. FGV Partners have the combined experience in management consulting, due diligence, support, investments and complex debt structuring to implement all phases of the proposed structure.
Pawame is an off-grid home solar company that has financed over 18,700 solar home systems and has a current active customer base of about 16,000 customers. Pawame has experience in receivables-based financing with several different leading Paygo investors. As distributors, they provide energy access and some of their contracts will be now owned by pilot seed investors.