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What Social Enterprises Need to Connect Poor Families with Affordable Solar Lights (GreenTech Series, Part 3)
We hope you enjoy the third and last installment of our GreenTech Series. If you like what you’re reading, please subscribe to our blog via email. Click to subscribe.
In case you missed it:
- Part 1: Solar Lights Have the Power to Illuminate Homes & Improve Lives (click to read)
- Part 2: Solar Light Solutions – Reaching the Last Mile (click to read)
by Peter Bladin, chief program and impact officer, and Danny Stokley, GreenTech Fund officer
In Part 2 of our GreenTech series, we discussed the various types of solar products that have emerged to provide lights and other appliances to families living off-grid. Given the impact and strong demand for these products, combined with affordable price points and financing options, why doesn’t every family living off-grid already have a solar panel on their roof?
The main reason is that this industry has just begun to emerge, and distribution takes time. While well over 10 million solar lights and solar home systems have made their way into the developing world, this represents only a small fraction of the households that could benefit from solar products. Value chains connecting manufacturers of solar lighting products to off-grid homes often literally cross the globe, and while the development of market linkages in recent years is encouraging, access to capital, particularly debt financing, remains a major obstacle at all levels of the value chain.
Solar Light Distributors Face a Working Capital Challenge
With strong consumer demand for solar lighting products, one of the main challenges for social enterprises that are trying to reach the most remote populations with solar lamps is the lack of working capital available to purchase products.
Most new generation solar products (small solar lights up through small home systems) are manufactured in China. Social enterprises that have made a business out of selling these products rarely receive flexible credit terms, and typically must make payments in full before the product leaves the port. Overcoming this hurdle is a major growth challenge for startup social enterprises, particularly those working with families that live in remote communities outside the energy grid.
Larger systems have the added complication of requiring end-user financing to become affordable, as most clients living off-grid are also among the poorest. The two most common mechanisms, a loan from a microfinance institution (MFI) or a Pay-As-you-Go (PAYG) model, typically last anywhere from six months up to three years. The length of time from product purchase to when the customer actually pays for it in full can easily be 2 years or more. In some cases a financing entity (such as an MFI) will absorb the end-user financing piece from distributors, but even then the lag time from purchase order to arrival in country is typically 3-4 months.
Long lead times require solar distribution companies to order product long before they have sold their current inventory, causing a persistent capital crunch. As a result, distributors often do not order enough product to consistently meet demand, and have scarce resources to invest in a salesforce to drive future demand. This situation impedes growth, and represents the greatest bottleneck in the supply of solar lights today.
Debt Financing – The Missing Piece of the Solar Light Puzzle
While socially motivated equity investors exist for solar light distributors looking to raise early stage seed capital, there are few entities offering working capital loans to growing social enterprises. The challenge with many small solar light distributors is that they are thinly capitalized and have inconsistent earnings. Local banks often charge prohibitively high interest rates, require term lengths inconsistent with distributor needs, or simply won’t offer working capital to these entities with few, if any, assets to borrow against. Without other options, many of these enterprises grow using personal resources or end up selling equity in their company. Meanwhile, they do not build business credit that can pave the way for future loans from banks and other commercial lenders in the future.
It’s clear that commercial capital is not yet ready to pour into this space. However, with a high-impact product and a clear market bottleneck, this challenge represents a terrific opportunity for impact investors. Offering debt financing to solar enterprises would not only help them grow, it has the potential to catalyze the sector, allowing emerging distributors to establish creditworthiness, an aspect strongly correlated with the success of small businesses. Bridging this financing gap will be the first step in proving the commercial viability of lending to solar distribution companies, and will almost certainly result in more solar lights improving the lives of off-grid families.
As an impact investor, Global Partnerships is committed to raising capital to invest in debt financing for social enterprises focused on off-grid solar. We have only just begun, but to date we are working with three partners in the Americas:
- In Haiti, we are supporting a marketing and awareness campaign of a solar light distributor, providing catalytic capital to help them increase their distribution footprint.
- In Peru, we recently offered a line of credit to a solar light distribution company, which will allow them to order from manufacturers in larger quantities, reducing their costs and freeing up working capital for in-country operations.
- In Guatemala, we are negotiating support for a promising young company piloting a PAYG model.
In addition, we are in discussions with leading manufacturers about creative ways we can provide working capital to their distributors, exploring concepts such as a trade finance fund or buyback guarantee. This is a new area for Global Partnerships, and the investment instruments and risk profile differ from those we are accustomed to with MFIs and cooperatives. However, we see an opportunity to leverage our expertise in debt financing to help a high-impact sector reach the point of being commercially investable. Once a social enterprise reaches that milestone, the potential for social impact is enormous.
If you enjoyed this blog post, you might also like:
- What's the Challenge in Getting Solar Technology to Poor Families? (click to read)
- Three Challenges in Bridging the Energy Gap in Nicaragua (click to read)
We hope you enjoyed the third and last installment of our GreenTech Series. If you like what you’re reading, please subscribe to our blog via email. Click to subscribe.