4.1.1. Partial Grants and Cost-sharing for Financing
Giving a grant to a business to fund operations or covering part of the business’ costs to overcome the business’ lack of access to capital (inability to attract equity, get a loan). An example of this would be grants and prizes awarded through the Development Innovation Venture (DIV).
- Appropriate capital to meet borrower needs
- Cash flow uncertainty
- Off-take risks associated with target sector/region
- Production costs associated with target sector/region
Increases the effective equity of finance seekers, thereby reducing the amount of debt needed by the borrower, making he/she more attractive to finance providers, simple to execute, fast-acting
May not reflect the actual amount of USAID funds needed to catalyze the transaction. For example, USAID may provide a large grant for $80,000 to a business when the actual shortfall between earnings and debt service is only $20,000. In this scenario, the Agency could have also supported 3 other firms like the one that received the grant with the $80,000 for 4 times the development impact.
MUST HAVE’S, CRITICAL POINTS, OR QUESTIONS TO CONSIDER
Lack of access to clean water is a critical problem in the developing world—3.4 million people die each year from preventable water-borne illnesses. Yet half of all water projects in the developing world fail within two years, primarily because of a lack of local ownership and proper incentive. Jibu—a social enterprise operating in Uganda, Rwanda, and Kenya—wanted to find a way to deliver affordable water to underserved urban populations at scale by unleashing the latent economic potential of emerging market entrepreneurs. However, insufficient local investment resources make it difficult or impossible to grow their business. Jibu applied to USAID’s Partnering to Accelerate Entrepreneurship (PACE) initiative for support.
USAID’s funding provided the working capital Jibu needed to purchase the equipment for its franchise expansion. Jibu’s entrepreneurs received this equipment, as well as tools, systems, training and consulting to ensure that they can capably run their own business. The entrepreneurs then repay Jibu as they generate revenue, which Jibu recycles into the next round of franchisees. By acting as both franchisor and bank, Jibu ensures that its franchisees receive both the financing and the support they need to grow.
With USAID’s $1 million grant, Jibu has already raised nearly $2.2 million from private investors who would have otherwise considered Jibu too risky.The partnership not only tests the viability of a hyper-local franchise model to provide access to clean water, but offers a model that can potentially be replicated to offer scalable solutions to other basic services in the developing world. As of January 2017, Jibu has created 426 jobs through 38 franchises and over 100 micro-franchises. It has sold more than 20.7 million liters of water to 312,000 customers, more than half of whom had previously been drinking unsafe water.