Complementary Currencies/BoK EN - Commercial Credit Circuit (C3)

General Description

C3 is an innovation of the Social Trade Organization (STRO) in cooperation with the World Bank (Inter-American Development Bank), The United Nations (Unido and ILO), the European Commission and the Dutch Ministry of Development Cooperation. C3 is a Business-to-Business complementary currency.

C3 is a money program that increases the liquidity position of Small-Medium Enterprises. SMEs are often confronted with a need to pay their suppliers within a short period of time, whilst their clients have negotiated favorable terms to their payment. In other words, SMEs have to pay now, but will receive only later on. It is often the powerful position of large retailers that is responsible for the situation SMEs are confronted with; they demand to be paid rapidly, but themselves pay as late as possible. As a result SMEs are often in need of short-term debt capital (loans) to pay their suppliers.

In the case of SMEs most equity capital is invested in current assets. SMEs usually have almost no fixed assets. However, most banks require fixed assets as collateral for loans. In addition banks are only interested in long-term loans of significant size. Short-term and small loans are commercially unfeasible. The financial crisis has made them even more cautious. As a consequence, SMEs often find themselves in a precarious situation.

Commercial Credit Circuit is an instrument that combines ‘factoring’ with a payment structure corporate holdings often use (Van Hilten 2009a: 1 & 9). Because factoring and corporate holding’s payment structures are usually not available for SME’s, C3 provides an interesting alternative.

Factoring is a mechanism usually employed by ordinary banks. Company A needs to pay of its debt to company B, but can only do this in multiple installments or after, let’s say 120 days. Company B however, is really in need of working capital in order to pay Company C. With factoring, the bank takes over Company B’s debt-claim towards Company A. Company B receives the whole debt amount at once from the bank. Company A pays the bank in regular installments, with Company B’s collateral as a guarantee to the bank. Conventional factoring is very expensive, and therefore not a serious option for SMEs. Moreover, as we have discussed, SMEs often lack fixed assets that can serve as collateral.

In corporate holdings such as McDonalds, multiple companies (e.g. the cattle farmer, the slaughterhouse, the transport company and the restaurant) are connected to each other like a chain. For convenience of quick transactions, they pay each other with an internal currency, using a current account system. For example the restaurant transfers the money received from its customers directly to the holding. The holding issues like value of internal currency to the restaurant. The restaurant uses this internal currency to pay of its supplier (the slaughterhouse), the slaughterhouse uses it to pay the cattle farmer and the transport company. For the slaughterhouse to buy food for its cattle at a company outside the holding, it approaches the holding to exchange the internal currency for ordinary money. The advantage of this payment structure is that the holding can dispose of a far larger amount of ordinary money at all times. After all no ordinary currency is circulating within its own subsidiary companies. This mechanism has (up to now) not been available to Small-Medium Enterprises.

C3 sets up regional business networks where SME’s pay each other using C3 credit rather than conventional currency. For payment they make use of an internet-based current account. With C3 businesses are able to exchange secured claims on future payments. It means that debt-claims are monetized into a complementary currency, and becomes directly available. It enables businesses to buy products from others now, and pay later. It works as follows: company A obtains C3 work capital from the C3 organization on the basis of a debt-certificate it has to its customers. Only the debt-claim itself is judged by the C3 organization, not the company or its business model as a whole, as is the case when businesses contract a loan at the bank (Van Hilten 2009a: 9). The debt-claims are insured by an insurance company, in case Company A’s customer defaults and will never pay of its debt. Because Company A receives C3 credit rather than conventional currency, it differs from factoring as previously described. Company A uses the C3 credit in turn to pay off its debts at the local supplier. The supplier needs to become part of the C3 network first (that is it has to open a C3 bank account), in order to receive C3 credit. The supplier has no choice but to accept C3, as Company A cannot pay in conventional currency immediately. With C3, debt-claims (and other assets) are liquefied and turned into a medium of exchange on their own.

At all times, the supplier is allowed to exchange its C3 credit for ordinary currency. But, because Supplier B is obliged to pay a fee, it is more attractive for the supplier to spend C3 credit at participating business C within the network rather than converting it to conventional currency to purchase at business D outside the network (Van Hilten 2009a: 9-10). This consequently strengthens the local businesses that are part of the C3 network. With a fee installed, C3 credit keeps circulating within the network and local economic activity is boosted. Moreover, using C3 credit, speeds up circulation of money. After all, multiple payments have taken place whereas the debt-claim is only paid off after 120 days. Now business C cannot find a suitable supplier within the C3 network. It thus decides to exchange its C3 credit for conventional currency. Business C accepts the fee knowing that it would not have attracted Supplier B as its customer if it wasn’t part of the C3 network (Van Hilten 2009a: 8).

In short, the C3 makes it possible for commercial transactions to occur before the money is available. It gives participants the opportunity to continue their activities in the supply chain, without waiting for the money of their clients, by transferring future claims on money as if it was already cash.