DAI-WEDP Profile of Key Ethiopian Small Businesses (Dec2015)

7/21/2019 DAI-WEDP Profile of Key Ethiopian Small Businesses (Dec2015)

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PROFILE OF KEY ETHIOPIAN BUSINESSES

Developed based on sample data from WEDP borrowers across 12

MFIs

DAI/WEDP

December, 2015



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Table of Contents

Methodology .................................................................................................................................... 3

Goals and Challenges ................................................................................................................... 3

About the WEDP Program and DAI/PEPE .................................................................................... 4

Advertising, Printing and Secretarial .............................................................................................. 5

Bakeries ............................................................................................................................................ 6

Beauty Salons ................................................................................................................................... 7

Boutiques ......................................................................................................................................... 8

Brick Manufacturing ........................................................................................................................ 9

Building Materials .......................................................................................................................... 10

Cafes and Restaurants ................................................................................................................... 11

Construction and Machinery Rental .............................................................................................. 12

Baltena/ Food Processing .............................................................................................................. 13

Hotels with bars and Restaurants .................................................................................................. 14

Import/Export ................................................................................................................................ 15

Retail Shops .................................................................................................................................... 16

Stationary Shops ............................................................................................................................ 17

Tailoring and Weaving ................................................................................................................... 18

Wholesalers – Grain, Vegetables and Fruits .................................................................................. 19

Wood and Metal Work .................................................................................................................. 20



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MethodologyThis report was taken from an analysis 2,275 out of 3,288 women-owned micro and small enterprises

(MSEs) who received loans from the WEDP program from January 2014 to September 2015. Types of

businesses selected were based on count. The reliability of these ratios is based on the number of

records included in the business type. The more records, the higher the quality and lower the standarddeviation. For this reason, we required at least 50 instances of loans made to a particular business type

to include it in the survey. However, due to the focus given to the manufacturing sector, we have

included two additional businesses with a count of less than 50 in the manufacturing sector:

Weaving/Tailoring and Brick Manufacturing.

Normally, a survey of this sort would focus only on good-quality loans. However, the data was collected

at the start of the loan term, it has not been segmented based on loan quality. At the time of this

writing, PAR30 was under two percent. However, it should be noted that most loans go bad toward the

end of the term, and these loans haven’t had time to encounter any repayment problems.

Goals and Challenges

The report has two goals:

1. First, to start developing MSEs industry benchmarks for the Ethiopian business sectors.

2. Second, to provide loan officers, credit analysts, managers, and credit committees with

insights into key types of small businesses and their financing needs, simplifying loan

analysis. For loan officers to successfully conduct ratio analysis of Ethiopian small

businesses, they must have baselines.

Analyzing this type of data presents several challenges:

Income and expenses are primarily self-reported by borrowers, who understand that

reporting high profits will lead to larger loan sizes. At times, there is also a tendency to

overstate expenses if they think the information might be shared with the tax authority. As a

result, the gross profit margins reported may be overstated or understated. Several

instances of unusually high margins are noted in the report.

The loan terms, regardless of sector, are uniformly around 36 months. This appears tobe due more to MFIs’ “comfort level” with the three-year term rather than basing on cash

flow analysis. From the data, we understand that loan terms are fixed by considering the

loan sizes, and with no or little emphasis on the nature of the business, its cash flow

generating capacities, or cash flow patterns. Otherwise, there should be more variation in

terms. Therefore, the loan terms listed should appear more as a warning than as a model for

loan officers to follow.



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About the WEDP Program and DAI/PEPE

DAI Europe, together with consortium partners First Consult, ITAD, Triodos Facet, and Business Creation

and Development (BCaD) Management Consultancy, is delivering the Private Enterprise Program

Ethiopia (PEPE) in Ethiopia on behalf of the UK’s Department for International Development (DfID). A

seven year project running from 2013-2020, PEPE aims to create more than 40,000 jobs (of which 75%will be for women), raise the incomes of more than 40,000 households by 20%, and support saving by

350,000 new customers of micro-finance institutions. The program has three technical components, or

pillars. The Women Entrepreneurship Development Program, or WEDP, supports 12 microfinance

institutions (MFIs) and the Development Bank of Ethiopia (DBE) with technical assistance and $45.9

million in lending capital to facilitate lending to individuals.

The Women Entrepreneurship Development Program (WEDP) is a World Bank-funded project and one

of its sub-components (i.e. the technical assistance to MFIs participating in the line of credit for

individual women entrepreneurs) is funded under the DFID Ethiopia (DFID-E)’s Private Enterprise

Program Ethiopia (PEPE). PEPE aims to support private sector development, through (1) improving firms’access to finance (the “access to finance” pillar), (2) addressing market and government failures in

identified priority sectors (the “priority sectors” pillar) and (3) supporting women entrepreneurs to

access microfinance products, particularly business loans.

The goal of WEDP is to assist its 12 MFI partners through needs-based technical assistance (TA), to

upscale and be able to provide financial products on a commercially sustainable basis to a client

segment that is above their traditional (e.g. group-based lending) client base. Particularly, WEDP

facilitates the development and refinement of a micro and small-enterprise (MSE) loan product

targeting women through 12 MFIs in six major urban areas across four regions of Mekele in Tigray,

Bahar Dar in Amhara, Hawassa in SNNP and Adama in Oromiya and two chartered cities of Addis Ababa

and Dire Dawa. In addition to the TA, a World Bank financed line of credit is available to the MFIs,

administered through the DBE as part of the larger World Bank WEDP activities. TA to the MFIs is a

mandatory condition of the loan from DBE.

Some of the MFI partners have been lending since January 2014.

Note: All monetary values are in ETB.



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Advertising, Printing and Secretarial

An average business in this category has the following

characteristics:

General profile: These firms provide advertising print

services in the form of banners, bill boards, brochures,

business cards, etc. Some of the businesses also

publish books, magazines, newspaper, and other

forms of print media. Additionally, they may provide

some secretarial assistance (writing letters, film

scripts, and some documents (mostly from hard copy

to a soft copy) and translating documents to different

languages).

Nature of business: High initial setup cost since

significant fixed asset purchases are required. Ongoing

cost is mainly cost of supplies, rent, HR cost and

utilities.

Investment requirements/fixed asset: Computers,

printers of different size, photocopy machines,

laminating machines, binding machine, furniture, etc.

Working capital requirement: For paying rent, buying

supplies including papers, banners, stickers, ink and

cartilage, paying staff salary, paying utilities, etc.

Loan size: Expansion normally requires substantialinvestment as it goes to fixed asset purchases. It

averages around 260,000 for the sample assessed.

Loan term: Averages 34 months, which seems high given the nature of the business, it is characterized by high

sales turnover and hence such long loan period may not be required.

Profitability: This type of business is among the high margin businesses, with average profit margin of 47%. Such

firms are only constrained by initial capital requirements and expansion. Once they stabilize, the profit margin is

quite attractive.

Appraising Advertising, Print & Secretarial business:

o Sales turnover: assess by dividing into different categories: review printing orders as one category, day

to day small secretarial and printing as second category and internet services as third category.

o

Consider number of machines, their capacities and number of manpower available to execute orders.o Check for regularity of maintenance services for the machines as the business highly depends on

functionality of machines.

o Challenges to consider: electricity-do they have backup generators? Connectivity-what options do they

have to ensure connectivity(alternatives), promotional activities and efforts, repeat customer base,

number of walk-ins in a day.

o Location of business: is it close to main market-ex. universities, government offices, center of town or in

residential area? Are there market linkages?

Advertising,

Printing &

Secretarial (59

Records)

Average Min Max

Years Operating 4.62 1 21

Loan size

disbursed

260,467 30,000 800,000

Loan term 33.27 24 36

# Employees

Before loan

5.4 0 82

Monthly Sales 204,875 6,000 1,200,000

Profit margin 0.47 0.03 0.96

Total Assets 820,668 12,000 7,226,000

Inventory Value 139,125 1,000 1,587,825

Debt to Assets 0.32 2.5 0.11



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Bakeries An aver age ba kery ha s th e fo ll owin g ch ar acte ri st ics :

General profile: Bakeries are businesses engaged in making

breads, cookies and cakes, which they produce and sell at

that same place/shop. The businesses involve mass

production and supplying to retail shops, restaurants, and or

cafes on the one hand and also retailing at the shop itself.

Investment requirements/fixed asset: Starting up a bakery

requires a high initial investment to acquire the necessary

machines. These include stoves, mixers, steamers, cutters,furniture, etc.

Working capital requirement/inventory: An established

bakery requires working capital to buy raw material/inputs,

mainly the flour (about 90%). Others include yeast, bread

improvers, sugar, butter, creamers, salt, packaging materials,

etc.

Loan term: Bakery is a high turnover business. The products

are sold immediately to end users or retailers. There is

limited stocking of inventories of finished products, except

for cookies. Hence, if a loan is given for working capital, the

loan terms should be for a short time, i.e., less than a year.

However, if the purpose of loan is to finance purchase of new

machineries, the term could go higher. However, one should determine the payback period based on the cash

flow analysis of the business.

Loan size: Loan size also depends on the purpose of the loan, i.e. whether it is for investment or working capital.

An average stove costs between 25,000 and 60,000, a mixer up to 90,000, and a steamer up to 25,000. If the

business is expanding, loan requirement could go up to 1.8 Million as seen in the sample, while average stands

at about 300,000.

Staffing: An average bakery employs between 3-5 staff, including one main baker, assistant baker, sales

person/cashier, and perhaps one distributor. Staff levels should grow with the size of the bakery.

Profitability: Profit margins average around 30%, but could go close to 100%. These depend on volume of

operation, location, market linkages and availability of inputs to maximize economics of scale.

Appraising Bakery-critical areas to review: What is important in appraising a bakery is capacity of production(check capacities of all machineries involved), standing orders from retailers, restaurants or shops, check daily

estimated production against sales records, and availability of enough inputs, etc.

Bakery (55) Average Min Max

Years

Operating

2.96 0.5 7

Loan size

disbursed

302,172 50,000 1,801,440

Loan term 33.52 12 48

# Employees

Before loan

5.19 0 15

Monthly

Sales

196,341 17,500 1,138,542

Profit

margin

0.29 0.03 0.94

Total Assets 703,944 37,480 5,349,000

Inventory

Value

100,109 1,000 950,000

Debt to

Assets

0.5 0.33 0.56



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Beauty Salons An avera ge Beauty Sal on has the fol lo wi ng

characteristics:

General Profile: Beauty salons are businesses engaged

in providing various hair styling services, manicures and

pedicures, and rarely also proving other spa services

including sauna and steam baths and massages.

Investment requirements/fixed assets: Most loans are

used to purchase salon equipment, including chairs,

hair dryers, various styling equipment, cosmetics, and

remodeling/expansion of workspace.

Working capital requirement/inventory: Inventory

typically represents a small portion (less than 10%) of a

beauty salon’s assets. At 13%, the average inventory to

total assets for those beauty salons surveyed appears

within the appropriate range.

Profitability: Beauty salons are a high-margin business,

likely due to low labor costs and minimal inventory

required. It averaged 47% in the assessed businesses.

Loan size: As this is a labor intensive service using

various equipment, there is a low need for working

capital. Hence, the loan is often taken for expansion of

the business by buying additional equipment and

furniture, and renovating the shop. A small percentage may go toward working capital.

Loan term: Loan terms go as high as 60 months in the businesses assessed, which is very long for this type

of business. It is a high-return business with cash flow generating capacity and should be able to repay the

loan in relatively shorter period.

Appraising Beauty Salons - critical areas to review: When judging the level of sales in a beauty parlor, loan

officers should consider the customer traffic witnessed within the store, taking into account seasonality

issues, cleanliness and attractiveness of the shop, current and/or potential competition depending on the

location of the shops and the number of hair cutting/styling chairs for clients, as well as availability of styling

facilities, competence and customer handling skills of the workers. It is also worth noting that loan officers

should try to verify all information obtained by checking against different documentations (e.g. books of

accounts) and conduct their own estimates with objective/reliable evidences. Typically, the purpose of the

loan is to renovate and furnish the salon, purchase equipment, and expand by increasing number of styling

chairs and providing additional spa services. Accordingly, most of the loan is for investment instead of

working capital.

Beauty Salon

(140)

Average Min Max

Years

Operating

4.06 0.5 26

Loan size

disbursed

208,879 25,000 800,000

Loan term 32.36 6 60

# EmployeesBefore loan 3.55 0 20

Monthly Sales 73,956 3,125 1,200,000


Total Assets 291,639 10,000 2,301,400

Inventory

Value

38,556 300 300,000



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Boutiques

An av er age Bout iq ue ha s the fo ll owing

characteristics:

General Profile: Boutiques are generally defined as stores

selling clothing and goods for children. Boutiques are high

turnover businesses, with the bulk of their assets in

inventory. The most common loan use for boutiques,

therefore, is to increase inventory, though in rare cases

loans may be used for renovation and expansion.

Investment requirements/fixed asset: A boutique is a

buying and selling business without adding value. Hence,

investment is limited to renovation of shops and initial

investment in shelves, displays and other furniture.

Working capital requirement/inventory: Inventory is a key

asset for a boutique and averaged 32% of boutique’ total

assets.

Loan size: Loans are mostly used for increasing stock and

diversifying items offered.

Loan Term: The average loan terms from the data appear

excessive. They should be shorter, as most loans will be

used to purchase working capital. Boutiques should turn

over their inventory fairly quickly, and the long terms

granted by MFIs are likely a product of habit rather than an

analysis of the business’s cash flow. Terms should likely be

in the one to two year range, rather than the three-year

terms habitually provided by Ethiopian MFIs.

Profitability: Boutiques are medium margin businesses, depending on the location and size of the business. It

averaged about 33% for the businesses reviewed.

Appraising boutiques-critical areas to review: When evaluating a boutique, loan officers should inquire about

the mark-up on goods sold. The mark-up must cover the boutique’s expenses and, therefore, should be higher

than the profit margin reported. Inventory level, location of business, and level of competition in the area are

important issues to review. Once again, the seasonality of business should be noted and information obtained

should be verified. Loan officers should make sure that borrowers are not projecting an excessive increase in

inventory, a more frequently observed tendency. The location of the stores and variety of items has strong

impact in projecting the cash flow.

Boutique

(347) Average

Min Max

Years

Operating

4.42 0.5 31

Loan size

disbursed

199,595 19,000 800,000


# Employees

Before loan

1.85 0 31

Monthly

Sales

208,792 5,750 5,160,000


Total Assets 479,397 26,980 5,174,200

Inventory

Value

155,836 1,600 1,000,000



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Brick Manufacturing An average Brick Manufacturing Business has the

fol lo wi ng ch ar acte rist ics :

General description: These are businesses engaged in

manufacturing bricks. It is a labor intensive business using

simple machines. These firms normally make bricks for

building houses and stoves-charcoal/electric. The main

inputs are sand/clay, gravels, and cement.

Investment requirements: Start-up requires machines for

making bricks, stoves, and acquisition of a working place.

In most cases, the working places are rented, and the

owners may be required to pay an advance of three to six

months’ rent.

Working capital requirement: After initial investment in

machines, the working capital required is typically forpurchase of the major inputs (sand, gravels, cement, clay,

etc.) and for paying utilities, rent and staff salaries.

Loan term: In the sample taken, the average loan term

averaged 33 months. However, since in the WEDP

program, startups are not financed, most of the loans

went to working capital and expansion by buying

additional machines. In this respect, the average of 33

months is at the high end and should be shorter to match

the cash flows.

Loan size: An average brick-making business requires a

loan of up to 800,000 ETB, depending on the purpose. Ifthe MFI finances a startup brick-making business, the

financing need may be double or triple of the currently

reported maximum loan size.

Profitability: Average profit margin for a brick-making business ranges from 29 to 50%. This is highly affected by

price volatility for the raw materials as well as for the final product.

Appraising brick making business-critical areas to review: The sales and cash flow generating capacity of the

business is determined by the number and capacity of the machines they own. Loan officers should attempt to

understand the daily production capacity of each machine and to determine the maximum production capacity,

given no supply/utility constraints. As this is a manufacturing business, assess if there are any supply agreements

with wholesalers. It is worth assessing the supply of inputs, as this depends on regularly of inputs. Therefore,

stability /reliability of supply is a critical issue to assess.

BrickManufacturing

(37)

Average Min Max

Years

Operating

3.91 1.00 10.00

Loan size

disbursed

277,083 60,000 800,000

Loan term 33.33 24 48

# Employees

Before loan

8.12 0 30.00

Monthly Sales 175,240 16,600 900,000


Total Assets 757,700 95,354 7,620,000

InventoryValue

99,324 5,000 539,000



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Building Materials An av erage bui lding ma te rial s shop ha s th e

fo ll ow in g char acte rist ics :

General description: These are retail shops

specializing in selling construction materials (cement,

pipes, iron bars, etc.) including finishing materials like

tiles, paints, bath tabs, washbasins, etc.

Investment requirements: For this type of business,

fixed investment is relatively minimal as it involves

buying the materials and selling them with no value

adding process. Working capital requirement: Inventory may

account for a significant portion of the asset, as this

is a retail type of business. Hence, financing is

normally required to increase inventory level and

generate more sales.

Loan term: Despite the nature of the business with

its high sales turnover, the loan term is normally

expected to be lower than the average calculated

from the sample, which is 35 months.

Loan size: Loan size is relatively bigger as the costs of

the materials are normally higher. The average loansize ranges from 50,000 to 900,000 ETB, averaging

about 300,000 ETB.

Profitability: Profit margin ranges from 9 to 87%,

depending on the items sold. This type of business is

highly affected by location, also determining the

margin.

Appraising building material shop-critical areas to review: In appraisal of this business, appropriateness of

location, ice, whether or not there is construction occurring near the shop or whether or not it is in a known

place for the purchase of such materials.

Building

Materials

Shop (97)

Average Min Max

Years

Operating

3.84 0 20

Loan size

disbursed

319,247 50,000 920,000

Loan term 34.67 18 60

# Employees

Before loan

3.34 0 15

Monthly Sales 439,679 - 1,923,000


Total Assets 877,810 40,500 8,540,000

Inventory

Value

278,107 5,000 2,000,000



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Cafes and Restaurants

An av er age ca fe an d re st au ran t ha s the fo ll owi ng

characteristics: General Profile: These are businesses involved in

providing hot and cold beverages and food services. The

businesses are at different stages in terms of size.

Investment requirements/ fixed asset: Fixed investments

for cafés and restaurants go to the purchase of furniture

(chairs and tables) and kitchen equipment. Fixed assets

will typically represent 80-90% of a restaurant’s assets.

When evaluating the appropriate level of fixed assets, loan

officers should consider these factors:

1. Does the restaurant rent or own its premises? Renters

will have a lower fixed asset base and higheroperating costs.

2. Who are the restaurant’s clients? Restaurants catering

to higher-income clients will need more expensive

furnishings and fixtures to create an atmosphere

appropriate to these diners.

3.

How complicated is the menu? The more complicated

the menu, the more sophisticated (and expensive) the

kitchen required.

Working capital requirement: Most financing needs for

cafés and restaurants go to working capital. These include purchase of supplies, including teff, wheat, fruits and

vegetables, spices, coffee, tea, sugar and other supplies required to make different variety of food and drinks.

Beverages also should be added to the list of inventory items for cafés and restaurants. Restaurant inventories in

comparable nations run between 10-15%, and the WEDP restaurants in our sample averaged 12%.

Loan size: Most of the loans given to cafés and restaurants are used for working capital purposes, as most

restaurants financed were those in operation for a while (averaging 5 years). Accordingly, loan disbursements

averaged between 10,000 to 1.8 million, with an average of 237,000. If the MFI finances a startup business, the

financing needs could be higher as these businesses are characterized by high initial investments.

Loan term: Average loan terms range from 12 to 44 months, with an average of 34 months in the sample taken.

However, this seems too long given the fact that most of it went to financing of working capital needs. Since this

is a high turnover business, the loan term needs to be shorter, ideally averaging 12 months or less.

Profitability: Cafés and restaurants are a high margin business. Accordingly, the profit margin could go over

100% at times, but averaged 35% in the sample taken. Profitability depends on the space available and variety of

items in the menu. Appraising café and restaurant-critical areas to review: Cafés and restaurants are affected by the location of

business, size of space and number of tables/chairs, variety of menu, and the attractiveness of the place. Loan

officers can estimate the numbers of users in a day based on the chairs and tables available. Be sure to check

occupancy at different times of day. One simple way for loan officers to compare cafés or restaurants and to

develop cash flow projections is by the number of tables. However, loan officers should keep in mind that

location, menus offered, food quality and the restaurant’s atmosphere can all affect pricing levels and cost

structures.

Café &

Restaurants

(263)

Average Min Max

Years

Operating

4.71 0.5 40

Loan size

disbursed

237,201 10,000 1,800,000

Loan term 34.13 12 44

# Employees

Before loan

6.18 0 43

Monthly Sales 180,987 4,000 4,131,400


Total Assets 488,109 5,110 6,502,000

Inventory

Value

61,397 962 742,693



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Construction and Machinery Rental An average construction and machinery rental has the

fo ll ow in g char acte rist ics:


rental of construction machinery like excavators, loaders,

dump truck, bulldozers, road rollers, mixers, etc.

Investment requirements: Costs of the machinery are

relatively high, estimated in millions of Birr. Hence, startup

is costly.

Working capital requirement: Working capital loans are

required to cover the high running costs, including fuels,

maintenance, salaries and commission and other costs to

operate the machines. Most of the financing needs from

the MFIs will cover working capital requirements.

Loan term: The average term ranges from 24 to 36

months, averaging 33 months. This seems high for a

working capital loan, and it should be lower to match with

the cash flows.

Loan size: Loan size is not high, as it is given for working

capital and not for purchase of the machineries. If the loan

is required for the purchase of machines, it would require

relatively bigger size loan.

Profitability: Profitability depends on the demand for the

services. The machinery generates higher cash flow in the

short term, but at times they may not get to market.

Appraising construction materials renting businesses-critical areas to review: The cash flow generating capacity

depends on the number of machines, the running cost for

each machine, the hourly rental rate and the demand. In

most cases, the demand for such machinery is high due to

the booming construction in the country. However, there are slack seasons like the rainy season, which needs to

be considered. Market linkages (working with different agents) are also a factor to consider. There is high

chance of getting the market if the borrower works with many agents/ broker than by themselves.

Construction

Machinery

Sale/Rental

(51)

Average Min Max

Years

Operating

3.5 1 10

Loan size

disbursed

350,588 50,000 800,000

Loan term 33.25 24 36

# Employees

Before loan

6.43 0 32

Monthly Sales 483,425 20,000 1,607,000


Total Assets 2,589,471 75,200 8,776,430

Inventory

Value

370,687 7,800 2,250,000

Debt to

Assets

0.14 0.66 0.09



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Baltena/Food Processing

An average Baltena has the following characteristics:

General Profile: Baltena (food processing) involves making

different varieties of spices. Though it is described as a

manufacturing business, the actual processing takes little

time. Hence, it is considered a business with high turnover

and labor intensive. This category also includes small-scale

manufacturers producing injera, primarily for wholesale.

Investment requirements: This is a labor-intensive business

with little investment requirement.

Working capital requirement: Capital is required for thepurchase of the raw material/inputs. Most of the assets are

in a form of inventory inputs as well as finished products.

Loan size: The loans are normally used for buying raw

materials/ingredients, i.e. for inventory, hence this type of

firm doesn’t require huge investment. It is normally a

handmade/labor intensive process. There are large-scale

producers requiring higher loans. Such producers normally

also own different machineries like grindings mills.

Loan Terms: One might assume that for a manufacturing

firm investing in fixed assets, an average loan term over

three years is reasonable. However, within the Ethiopianfirms surveyed, many food processing firms were seeking

loans for inventory. Inventory is processed and then sold,

presumably within at least a one-year period (hopefully

sooner). Loan terms should be careful to provide appropriate loan terms based on the use of the loan as well as

the business needs.

Profitability: Food processing is a fast-moving business, more similar to trade as the processing is done over

short periods and the items sell quickly. Profit margin can go up to 80%, but highly affected by seasonality.

Appraising food processing businesses-critical areas to review: Emphasis should be given to availability of

market linkages due to the nature of the business, daily manufacturing capacities and quality of the products.

Borrowers need to have regular customers that receive the items in bulk and as a standing order. Seasonality,

and variety of spices produced should also be considered.

Food

Processing

(114)

Average Min Max

Years

Operating

4.48 0.08 35

Loan size

disbursed

245,544 40,000 2,000,000

Loan term 33.34 12 60

# Employees

Before loan

4.64 0 40

Monthly Sales 261,696 8,000 1,999,800


Total Assets 506,091 17,900 4,800,000

Inventory

Value

122,887 8,000 1,235,000

Debt to

Assets

0.49 2.23 0.42



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Hotels with Bars and Restaurants

An average hotel with a bar and restaurant has the

fo ll ow in g char acte rist ics:

General Profile: The hotel business has higher initial costs

and relatively low running costs once functional. The main

purpose of loans to established hotels is for expansion, i.e.,

construction of additional rooms and renovation-hence

capital intensive. A relatively smaller portion of loans is

used for working capital.

Investment requirements /Fixed Assets: Fixed assets

account for a high percentage of total assets, mainly

acquired during start-up. When evaluating the value of thefixed assets, loan officers should consider their age and

condition.

Working capital requirement: /inventory: Hotels typically

have less than five percent of their assets in inventory, with

a slightly higher percentage for hotels with restaurants. In

the sample assessed, the average was about 14%. The low

percentage is because the total asset is relatively bigger as

it often includes buildings.

Loan size: The loan size could be relatively bigger

depending on the purpose of loan. If the loan goes toward

renovation, a higher loan size may be required. But in mostcases, the loan goes to working capital, going as low as

15,000 ETB.

Loan term: The loan term also depends on the purpose of loan. Working capital loans can be repaid over a

shorter time period. For the businesses reviewed, it ranged from 12 to 60 months, with an average of 35

months. Since most loans are for working capital , the average loan tem should be shorter.

Profitability: Small business-sized hotels are typically high-margin businesses, largely because the majority of

costs in the hotel business are up front, during the construction and start-up phases. The average profit margin

in the sample assessed is about 37% but could go as high as 98%, depending on the quality and location of the

hotel. Additional services in bar and restaurant contributes to the high margin.

Appraising hotel businesses-critical areas to review: Loan officers assessing hotels should note that once past

the start-up phase, the largest cost should be labor and supplies, and this should be relatively low in Ethiopia,

resulting in high profit margins. Accordingly, most of the loan goes to working capital if it is a mature hotel; while

the loan goes to investment if it is in start-up phase (or if there is a planned renovation). While estimating cash

flow, room prices and average occupancy should be assessed. There may be some seasonality in the hotel

business which needs to be considered as well. Seasonality issues should also be considered while fixing

repayment schedules. Hence, instead of setting a standard loan term, the maturity level of the hotel and the

intended purpose should be analyzed in setting appropriate terms that match the cash flows.

Hotels with

Restaurants

(281)

Average Min Max

Years

Operating

4.77 0.5 35.00

Loan size

disbursed

254,031 15,000 2,400,000

Loan term 34.39 12 60

# Employees

Before loan

5.48 0 50.00

Monthly Sales 166,777 6,520 1,286,808


Total Assets 637,513 1,200 11,372,200

InventoryValue

85,868 578 1,699,880



15 | P a g e

Import/Export

An average import/export business has the followingcharacteristics:

General description: These businesses engage in

importing various processed materials including clothing,

merchandise, and various equipment. The size of the

businesses vary, mainly depending on the amount of

working capital they have and the business license they

hold, which might restrict the type of material to be

imported.

Working capital requirement: This is a capital intensive

business. The more working capital they have, the bigger

the business can grow. Accordingly, financing needs are

more for working capital.

Loan term: The loan term shouldn’t be too long due to

the high turnover of the business. The average of 33

months seems to be high, and MFIs should consider

reducing it.

Loan size: Loan size depends on the nature of the items

the business license allows them to import. A business

importing clothes needs lower capital than the one

importing heavy machines. In the assed businesses, it

averages about 386,000.

Profitability: The profit margin ranges from 6 to 74% in

the sample, averaging 26%. This is affected by the volume

of import.

Appraising import and export businesses-critical areas to

review: The variety of materials covered, demand for the materials, volume of imports, availability/access to

foreign exchange and relationship with banks, sales arrangements (diversification of recipients and standing

agreements) are critical factors to consider. Lead time to import materials (including customs clearance time) is

also another critical area to assess.

Import &

Export

Business

(60)

Average Min Max

Years

Operating

4.44 0.5 33

Loan size

disbursed

386,917 100,000 1,075,000

Loan term 32.55 24 36

# Employees

Before loan

4.56 0 35

Monthly

Sales

1,421,644 30,000 18,836,250

Profit

margin

0.26 0.06 0.74

Total Assets 1,876,801 126,000 23,870,000

Inventory

Value

523,619 3,000 2,200,000



16 | P a g e

Retail Shops

An average retail shop has the following

characteristics:

General Profile: Retail shops are one of the most common

activities Ethiopian women are engaged in. It involves

buying and selling various commodities/merchandise. It is

a fast moving business with high sales turnover and low

investment cost.

Investment requirement: Investment in retail shops

involves acquiring the shop and furnishing it with shelves

and displays. These are normally a one-time investment,

with less frequent expansion and renovation. Hence, in

most cases, and for mature businesses, a loan is required

to increase stock levels.

Working capital requirement: Inventory is the major asset

for a retail shop. Typically, cash and inventory will account

for 40-50% of total assets. At times, Inventory levels could

account for up to 80% of total assets.

Loan size: Loans normally go toward buying

merchandise/inventory, though rarely they might be used

for the purchase of fixed assets. The average loan size isabout 167,000 ETB.

Loan term: The loan terms here again appear excessive. A

strong retail shop should be able to turn over its inventory

well in advance of 33 months. MFIs may wish to consider

shorter loan terms, based on the borrower’s capacity to

repay.

Profitability: Margins in retail shops will vary widely based on the type of goods sold.

Appraising retail shops-critical areas to review: When loan officers review the sales of a retail shop, they should

closely examine the location. A shop in a high-traffic area has a strong sales advantage over a shop hidden in a

dark alley. Moreover, inventory levels and competition in the area should also be considered in estimating sales

and expenses. Variety of items offered also need to be considered.

Retail Shop

(535)

Average Min Max

Years

Operating

3.93 0.5 26

Loan size

disbursed

167,714 10,000 745,000


# Employees

Before loan

1.7 0 18

Monthly Sales 146,530 2,352 3,749,185


Total Assets 382,983 8,000 5,384,000

Inventory

Value

119,215 1,700 4,418,000



17 | P a g e

Stationary Shops

An average stationary shop has the following

characteristics:


the sale of stationery items including notebooks, pens,

pencils, papers, markers, staples, punchers, folders,

clips, sticker, etc. They can range from small to medium

size shops, which also can accommodate bulk

purchases.

Investment requirements: The business doesn’t require

fixed investment as such. It is the buying and selling of

stationery items. Fixed investments may only include

shelves and renovating shops, if owned.

Working capital requirement: Most of the assets are in

the form of inventory. Hence, financing is mostly

required to increase stock levels and increase the

variety of items offered.

Loan term: The loan tem should be relatively shorter,

as this is a high-turnover business. The average term is

32 months for the businesses reviewed, which seems

high for this type of businesses. MFIs need to consider

shortening the loan term to match with the cash flow

pattern of the business.

Loan size: Loan sizes range from 20,000 to 1 million ETB

in the sample reviewed. The loan size can be bigger

depending on the space available and demand in the

area, and if the business offers wholesaling service.

Profitability: This an average margin business with profit margins averaging at 31%.

Appraising Stationary shops-critical areas to review: Inventory management /control, location of shop (near

school, universities), variety of items supplied, and turnover of major items (check for purchase dates and check

against stock levels).

Stationary

(68)

Average Min Max

Years

Operating

3.8 0.5 11

Loan size

disbursed

236,353 21,000 1,000,000

Loan term 31.55 12 60

# EmployeesBefore loan

2.14 0 8

Monthly

Sales

247,134 5,000 2,170,000

Profit

margin

0.31 0.04 0.75

Total Assets 477,807 10,300 2,880,000

InventoryValue

160,794 2,000 900,000



18 | P a g e

Tailoring and Weaving

An average tailoring and weaving shop has

the following characteristics:


making traditional cloths, as well as making ready-made

clothes for women and men. Raw materials include

cotton and sewing threads.

Investment requirements: Initial investment for this

business includes various weaving equipment, sewing

machines, iron for stretching cloths, etc. Part of the loan

taken could go for the purchase of more equipment and

expansion of the business. Working capital requirement: The business involves the

purchase of raw materials and processing and selling

final products. Hence, they need funds for the purchase

of raw materials in bulk and to increase inventory of final

products for sale. Inventory is both in raw material and

the final product. Inventory accounts for about 27% as

seen from the sample businesses.

Loan term: As loans are taken for both investment and

working capital, the loan term could be an average of 24

months. For the sample businesses, it ranges from 24 to

60, which is on the higher end.

Loan size: Weaving/tailoring businesses range from

small to medium, with relatively medium financing

needs. Expanding businesses may need higher loan sizes to increase the number and improve the quality of

machines used, compared to mature businesses, which may only require loans for working capital. In the latter

case, the loan amounts would be lower.

Profitability: These businesses have average profitability of about 30%. It could go to as high as 71% depending

on the target market. Some businesses target people in medium and high class, including tourists, in which case

they earn higher margins.

Appraising Weaving/ tailoring businesses-critical areas to review: As these are mainly engaged in making

traditional clothes, the business is highly affected by seasonality. The peak seasons are around national holidays

and the slack season is during the rainy season. Design makes a big difference in the current market. Those

businesses focused on making new designs, especially appealing to the young generation, may attract morecustomers compared to those sticking to the common traditional designs.

Average Min Max

Years

Operating

4.24 0.5 17.00

Loan size

disbursed

303,397 35,500 1,000,000

Loan term 35.21 24 60

# Employees

Before loan

5.34 1 33.00

Monthly Sales 221,054 9,600 824,500


Total Assets 638,742 41,270 2,985,000

Inventory

Value

173,405 2,000 900,000



19 | P a g e

Wholesalers – Grain, Vegetables

and Fruits

An average fruit, grain and vegetable wholesalerhas the following characteristics:


the sale of vegetables and fruits, and those in the sale

of various grains also providing grindings services,

especially for teff.

Investment requirements: These require relatively

larger investment to buy the grinding mill/ machines.

Grinding mills cost between 50,000 and 80,000. For

those selling fruits and vegetables, their initial

investment is low.

Working capital requirement: All businesses in this

category require relatively larger working capital to

buy items in bulk and obtain price advantages.

Loan term: The loan term should be low for mature

business demanding working capital loans. But it

averaged 33 months for the sample businesses

reviewed, which is on the high end.

Loan size: The loan size depends on the purpose of

loan. In most cases, loans go to working capital to buy

commodities in bulk and sell to retailers. In such

cases, they may require higher loan sizes. Theaverage loan was 235,000 for the assessed

businesses.

Profitability: The average profit margin was 25% for

the sample reviewed. The margin is affected by

seasonality and price of grains and vegetables which are volatile in the market.

Appraising wholesale businesses-critical areas to review: A wholesaler needs to have regular customers

(retailers), and this is a key area to be assessed during appraisal. Regularity and stability of supply is another

critical area to review. Since most of the loan request goes to inventory financing, ensure that increases in

inventory are within the limit of the business, given its current status, and they will be able to accommodate.

These include space, the inventory control system in place and the demand. Increases in inventory by more than

two times will have more risk as the capacity (management capacity plus demand) to cope with the increasedinventory is not tested.

Wholesaler -

Grain/Veg/

Fruit (71)

Average Min Max

Years

Operating

4.53 0.5 20

Loan size

disbursed

235,521 35,000 1,396,000

Loan term 33.23 12 48

# Employees

Before loan

2.52 0 10

Monthly

Sales

307,208 7,500 3,456,000

Profit

margin

0.25 0.04 0.92

Total Assets 538,772 13,750 3,000,000

Inventory

Value

114,803 1,500 439,500



20 | P a g e

Wood and Metal WorkAn average wood and metal work shop has the following

characteristics:

General description: These are business involved in

producing furniture from wood and metal. Most have

a large manufacturing area to produce household and

office materials. The finished products often include

beds (metal and wood), office tables and chairs

(wood), doors (metal and wood), and the like.

Investment requirements: Metal and wood works

require high initial investments to buy the necessary

machinery. On-going investments are minimal unless

they want to change the machines.

Working capital requirement: The working capital is

also relatively larger for this type of business, even

though it varies with the size of the business. The raw

material, i.e., different metal and wood, are normally

purchased in bulk and costs are high.

Loan term: Businesses buying machinery require

longer terms than those using the loan for working

capital purchases. For the businesses surveyed, the

loan term ranged from 24 to 60 months depending on

the purpose of loan determined by maturity of the

businesses.

Loan size: Loan sizes ranged from 269,000 to 1.2

million for the assessed businesses. The loan size is

affected by the size of the business and the purpose of

loan.

Profitability: The profit margin depends on the quality of the products and material used. On average it was

about 29% for the sample assessed. Design and location of workshop determines cost structure of the

businesses and hence the profit margins.

Appraising Metal and wood work-critical areas to review: The number and capacity of machines required for

each stage of the production cycle should be reviewed. Staffing levels, quality of products and availability of

inputs are among factors to be assessed.

Wood and

Metal Work (62)

Average Min Max

Years Operating 4.44 0.5 22

Loan size

disbursed

269,323 30,000 1,200,000

Loan term 34.58 24 60

# EmployeesBefore loan

6.64 0 25

Monthly Sales 275,805 2,000 2,030,000


Total Assets 708,740 10,000 3,636,000

Inventory Value 196,305 2,500 1,625,000

Debt to Assets 0.63 0 3.00

Documents

DAI-WEDP Profile of Key Ethiopian Small Businesses (Dec2015)