Arrow Global Capital represents a new currency of impact investing – financial returns go toward Arrow’s operations and philanthropic investors earn returns through existing investment portfolios. Not a cash fund, Arrow serves as an intermediary that is able to leverage a philanthropic investor’s financial standing to offer debt financing instruments for emerging market entrepreneurs, all while allowing the philanthropic investor to keep investments and cash flows intact.
Considered the missing middle in emerging nations – too large for microfinance and too small for (or unable to access) commercial funds – small- and medium-sized enterprises (SMEs) are businesses with 5-200 employees and with annual revenues between $30,000 and $5 million. Lack of access prevents these businesses from driving economic growth & creating more jobs, what they’re best at doing.
Arrow is operating at the ground floor of two rapidly spreading emerging market interventions: impact investing and SME growth.
What is Arrow’s corporate structure?
Arrow Global Capital is a tax-exempt organization under Section 501(c)(3) of the IRS Code. Undergirded by a unique business model, Arrow is projected to be economically self-sufficient within three years.
Why should I join Arrow’s mission when our own economy is oft unstable?
Though the missing middle exists even in the United States, the banking infrastructure in place makes capital access much more attainable. Likewise, the processing of obtaining a credit history is much more simple than in most emerging market nations. None of this means businesses in the missing middle here in the United States should be forgotten, but that that Arrow – and the business model behind it – center around strategically engaging and connecting emerging entrepreneurs in a way no other investment platform has been able to do.
What is the quantifiable impact of supporting SMEs?
According to a global research study by the Small Enterprise Assistance Funds (SEAF), every $1 invested in an SME produces $13 in benefits to the local community through employees, customers, suppliers, local government, competitors, and so on.
Additionally, measurable social outcomes include:
> Jobs created and sustained for bottom-of-the-pyramid populations
> Increase in social responsibility; giving back to and reinvesting in the community
> Food & healthcare security for operators, employees, and their families
> Opportunity for employees’ children to attend school rather than have to work themselves to provide additional income for the family
> Local access to construction, business, and education loans
Where does Arrow work?
Currently, Arrow has loans out in Nicaragua and Mozambique, with partners across Central America, Africa, Eastern Europe, and South Asia.
Why work with Arrow as opposed to investing directly in a SME?
> No cash upfront; guarantee-based
> Steady deal flow; don’t have to source independently
> Rigorous training/mentorship delivered by Arrow’s partners
> Innovative vetting process for both accelerator partners and entrepreneurs that relies on social, environmental, relational, & financial criteria
> Shared risk (pooling of guarantees)
> Local bank relationships to increase local borrowing capacity; risk mitigation
> Risk-reduction measures not found through other intermediaries
> Primary & secondary finder’s fees
> On-the-ground mentoring/accountability
How does Arrow interact with local players?
Arrow’s model is built on partnerships. We work with highly vetted accelerator partners on the ground that deliver (and have been for at least three years) intensive technical assistance to entrepreneurs. Starting from an initial list of 285 accelerators, our team used rigorous criteria to narrow this number down to 9; today, we have relationships with 6 of these accelerators. Delivering training in every field from accounting to marketing, our accelerator partners send top-tier alumni of their programs to Arrow for further review. After successful completion of two rounds of underwriting, selected entrepreneurs are eligible to receive debt financing that has been mobilized by way of our front-end guarantee mechanism.
The loans are administered by Arrow, in partnership with our local accelerators and local bank partners that track the cycle, thereby increasing or establishing a credit history for the entrepreneurs, and giving Arrow local legal jurisdiction should a default ever occur.
How does each accelerator partnership work?
Arrow’s accelerator partners are paid a primary (upfront) brokerage fee for their work in identifying, advising, and helping to vet SMEs. Additionally, the accelerator partners receive a secondary, success-based finder’s fee at the end of the loan cycle for their work in helping to monitor the loan and advise the entrepreneur. The initial brokerage fee is negotiated under the loan agreement, while the secondary fee is payable by Arrow at the end of the loan cycle.
Do any of Arrow’s local partners also invest in their entrepreneurs and provide them loans and funding?
The local accelerators Arrow has partnered with have the provision of technical assistance as their primary goal. These accelerators help entrepreneurs get ready for capital infusions, and upon completion of training cycles, they help broker financing for their alumni by connecting them to intermediaries like Arrow. Most do not provide any sort of financial support to entrepreneurs directly.
What is the exact timeline for Arrow selecting an SME to support?
The two rounds of diligence mentioned earlier are expected to take approximately two months — though we seek to let businesses know very quickly if they don’t fit our basic criteria. Selected SMEs will either receive funds immediately or be placed in the Arrow pipeline for funds, depending on the cash flow at the time. Our goal is to keep the flow steady, never making entrepreneurs wait more than necessary.
So Arrow’s core focus is mobilizing capital via guarantees. What if I want to earn a return?
You can absolutely participate in the Arrow platform as a more typical investor, earning a return. Or you can even collateralize the guarantee at one of our financial partners if you’d like to skip the financial verification step. Speak to a member of our team to learn more.
What are some examples of the types of SMEs Arrow will support?
Arrow does not restrict its funding to specific industries or sectors. Instead, we seek to work with entrepreneurs who have the greatest need, the best plans, the best training, and the best chance for commercial success. Click here to learn about MarExport, Poultry Works, and other enterprises in Arrow’s pipeline.
How does Arrow decide how much funding a SME will receive? What are the specific criteria being considered?
Arrow’s diligence requirements include a review of the company’s business plan, financial statements & projections, a report on social impact, and many other elements. Each SME – with the accelerator’s guidance – will put together a loan prospectus, detailing how funds will be used. This amount will either pass the diligence test, or will be sent back to the entrepreneur for an amendment.
Who are the local banks and how are they to be trusted?
Sourced via Arrow’s partner accelerators, all local bank partners have stellar national and regional track records. Most are seeking to get into the SME sector and see Arrow’s model as a way to gain future business in the space. Arrow’s accelerator partners have used these local banks for numerous transactions over a period of years, ensuring fiscal integrity and local responsibility.
How large is each loan administered by Arrow?
Our target loan size is $50-250k. This is where the greatest need exists, and also where the least risk resides, as these enterprises are MSMEs, or medium small- and medium-sized enterprises, right on the cusp of local commercial access, meaning their social outcomes will be compounded.
What sort of term would I be signing up for?
Loan cycles last 4-5 years; however, you can exit the pool within 18 months of notifying Arrow team in writing, or as soon as we can find a replacement, should that become necessary.
Do interest rates charged to entrepreneurs fall in the global fair market range?
Yes, interest rates will vary by geographic location, but all will be in the global fair market range. They will generally be 12-15%.
How exactly does it work if I sign up to be a philanthropic investor?
We thought you’d never ask. Please click here to learn more.
What happens if a loss occurs in the portfolio?
Every new philanthropic investor that joins the Arrow platform becomes part of the pool, meaning that any loss would be shared pro rata across the pool, and would be tax deductible for each party.
What is the minimum guarantee commitment?
Can a guarantor take a trip to visit the businesses they have helped to support?
Absolutely, we’d love to share our work with you firsthand. We take periodic vision trips. Ask us about them.
Which is more important, financials or impact potential, during underwriting?
While both aspects of a business are extremely important during Arrow’s underwriting process, the financial viability of said enterprise has to rank slightly higher for the impact potential to be realized and sustained.
What does becoming a philanthropic investor with Arrow mean for my financial portfolio?
Investments and assets all remain intact – Arrow is not seeking your cash, but the ability to leverage your financial standing to provide debt financing to vetted emerging market entrepreneurs as they scale, create jobs, and transform communities. The financial partners we work with currently are not required to submit the guarantees to credit bureaus, meaning that participation with Arrow has no effect on your consumer credit rating. As such, it would not impact your ability to buy a house, a car, or take out a personal loan.
What does the verification process with the bank look like?
To execute the guarantee, one of our U.S.-based lending partners will need to verify basic financial information. This process is made much easier with the guarantee calculator, which serves as a sort of self-qualifying tool from which input information can be verified. Fully completing the calculator and linked financial statement will provide the bank with the information needed to verify your financial standing.
What sort of personal or social rewards/benefits can I expect from engaging with the Arrow platform?
• Continued control of assets & investments; no cash upfront
• Promotes local access to future lending for entrepreneurs: business, construction, education
• Negotiated partnerships allow money to be recycled, achieving compounded impact
• You can “invest for impact” in the developing world with a model that has less risk than direct financial investments
• Creates steady employment opportunities, provides food & healthcare security, supports education access for children of the employed
• Allows otherwise “idle” capital to achieve global impact while continuing to earn you market returns
How does Arrow mitigate risk to protect my investment?
- $50k first loss reserve in place
- Repayments for SMEs globally sit at 94-96%, before Arrow’s risk mitigation measures and partnerships
- All loan documents were drafted by our legal team at Kirkland & Ellis in New York, adapted to reflect local bank conditions, and verified by local legal counsel to ensure they meet jurisdictional requirements
- Underwriting for each loan is done through an intensive two-tiered process, ultimately being approved (or denied) by our Loan Committee, made up of members from Arrow’s Board and outside advisors
- Local accelerator partners provide ongoing business mentoring/coaching throughout the loan cycle
- Per our negotiated agreement, they’re tasked with identifying possible trouble spots and delivering reports to Arrow, for which they’re paid a success-based fee at the end of the loan cycle
- They have an incentive to see the business succeed (aside from the strong relationship they already have) in the form of a reducing and ultimately bottomed-out fee, should a series of late and/or missed payments occur
- Local bank partners provide entrepreneurs with a credit history and give Arrow local legal jurisdiction
- Should a default occur, the local banks Arrow has partnered with have the authority to make collections, something we as a U.S.-based institution would have a tough time doing without this relationship
- Additionally, each entrepreneur understands his/her future borrowing capacity in that country is tied to repayment of the loan from Arrow because of the bank’s deep involvement and regular reports to the national credit bureau
- In Africa, collateral is defined upfront in the loan agreement; in Latin America, there is a “collateral” clause in the loan agreement, allowing Arrow to seize any and all property (up to the value of the loan), which is enforceable by the local bank
- Although unanticipated, there are numerous measures in place to deal with delinquent loans should they go off track
- Arrow receives quarterly reports on each loan, the information from which is passed on to the pool of guarantors