Financing Agribusiness

Agribusiness remains one of the hardest sectors to raise funds not only because people see it as crude, a lot of venture capitalist, angel investor and other types of investors see it as no-go-area for investment. Every farmers need investment for agricultural development, hence financing in agriculture becomes necessary.

The combination of agriculture and business is what makes up agribusiness, agribusiness is any, I mean any business related to farming and farming related commercial activities. Strategist in the agricultural sector saw a need to make sure people see agriculture as a business. Farmers loses so much because of farmer’s inability to combine and see the business of agriculture.

We can see financing as a way of funding agribusiness I mean, the act of obtaining or furnishing money or capital for farming enterprise. Financing can be done in many ways while some finance through investors, some finance through loans and other banking facilities provided. Different categories of farmers seems to need investment in different aspect of agriculture and while some needs small investment to scale others need bigger investment to scale.

Even though agriculture can contribute about 25% of Africa GDP and even provide about 70% employment, the sector needs large amounts of sustained investment, many billions of dollars annually and easier access to markets and the latest tools and techniques to bring into the 21st century and transform it into a net exporter of commodities. The continent is a top producer of many of the world’s best-loved products, including cassava from Nigeria, cocoa from Côte d’Ivoire and Ghana, tea from Kenya, and fruits from South Africa.

Rising income and urbanization are driving investments in agribusiness, estimated to develop into a US$1 trillion industry by 2030, up from US$313 billion in 2010. These trends offer bright prospects for creating jobs and income opportunities that are crucial for ending extreme poverty and boosting shared prosperity. Yet agribusiness faces major challenges. A survey of 75 agribusiness firms in Nigeria cited infrastructure, financing, securing supplies, and the policy and regulatory environment as the greatest constraints to agribusiness investments. Regarding financing, African agribusiness faces a multibillion-dollar financing gap estimated at US$11 billion annually for expansion of agricultural output, and in Nigeria alone working capital needs for agribusiness are estimated at between US$4.6 billion and US$6.5 billion per year. Significant financing is also required for midstream and downstream agribusiness activities, such as processing, logistics, and trade as researched by Africa agrifinance.

Finance for working capital was a priority need to meet production costs across farms and agribusiness firms of all sizes and across all value chains. In farm operations, financing of working capital was crucial for purchasing inputs such as seeds, fertilizer, agrochemicals, and hiring labor and farm equipment. Off-farm businesses needed finance for working capital to purchase inputs and meet expenses for logistics and transportation for different value chain activities. Financing for investment capital was also an important need, primarily for non-land assets and industrial construction. At farm level, farmers and cooperatives identified investment in farm assets (tractors and farm equipment) storage and warehousing facilities, and irrigation as priorities for investment financing. Off-farm respondents identified financing of assets such as equipment, transportation, and industrial property (storage and warehouse facilities and processing plants) as priorities for investment finance. Different value chain actors face varying challenges in accessing finance, including appropriate types of financial instruments as well as range and cost of finance, suggesting important roles for context-specific and, in some cases, tailor-made financial instruments. Challenges in securing investment finance are also likely to translate into weak incentives for adoption of climate-smart agricultural technologies and management practices.

We can divide the source of funds into 2 namely:

  • Informal source of financing
  • Formal source of financing

Informal source of financing: Small holder famer have smaller plot of land of majorly a plot to about 10 acres of land, they majorly and mostly consider informal source of financing which is the most common and easiest for them. Most times friends and family contribute to finance equipment, tools and input for them while they pay back significantly in bit and sometimes with a little returns on investment.  Apart from friends and family contributing to small holder farm development, own savings, and retained earnings were also seen as the main sources of finance for farm operations.

Here, credit from input suppliers is very rampant but it now appeared to be reducing at farm and off farm levels, input suppliers now find it very difficult to release some farm input, equipment and materials. This is due to the rate at which materials, input and equipment borrowed are never return, also a lot of returns on investment promises has failed.

Formal source of funding: Commercial banks is found under this category, Formal private financing mostly comes from domestic sources, mainly commercial banks, and external sources through foreign direct investment primarily from investment funds and multinational agribusiness companies. Commercial banks will never do unprofitable business and they have little or no trust in small holder farmers even when they fund farmers they fund the middle and large scale farmers, particularly the processors and other platform on the agriculture value chain. Small holder farmers are always considered when there are strong cooperatives and collaterals that can be seized in case the capital and returns on working capital investment are never seen or provided.

One of many problems faced here is the fact that many loans collected from commercial banks are always on short terms, difficult terms of collateral that are not even in tune with the needed finances or loan. This particular problem is due to the lack of adequate knowledge of banks staff as majority of them do not have the knowledge to deal with local, small holder farmers. Farmers also find it difficult to understanding the terms and condition of the commercial banks as majority of the small holder farmers are very low educators and reading is a tedious exercise for this particular set of people.

Types of funding platforms

  • Banks: This could be a commercial bank, microfinance banks or traditional bank, they give out loans to farmers or agribusiness value chain that can give back profitable returns on investment.
  • Venture capitalist: A private equity investor that provides capital to companies exhibiting high growth potential in exchange for an equity stake. This could be funding startup ventures or supporting small agribusiness firms that wish to expand but do not have access to equities markets.
  • Angel investors: An angel investor is a high-net-worth individual who provides backing such as mentorships, finances, and maybe networking to small startups or entrepreneurs, typically in exchange for ownership equity in the company. While some angel investor aim for equity some aim for returns on investment after waiting for a long time giving grace to agribusiness firms to grow and expand.

How Do Agropreneur Finance Agribusiness?

  • Have a well-crafted agribusiness plan: A business plan is a written document that describes in detail how a business usually a startup defines its objectives and how it is to go about achieving its goals. A business plan lays out a written roadmap/traction for the firm from marketing, financial, and operational standpoints. Business plans are important documents used to attract investment before a company has established a proven track record. It is ideal for all company to have a business plan especially when they have a new idea for development. A good business plan should have a good executive summary, an excellent financial projections with well documented revenue model. A pitch deck of 7 -10 slides that can be used to present your idea to investors will go a long way too.
  • Have a good knowledge of the business: All business owners must have the knowledge of their business; they must be able to give answers to what a staff can’t give answers too. The knowledge of your business makes investors have a better understanding of your business and it makes funding and financing easier. Having a team will also go a long in making agribusiness funding easier. A passionate and intelligent team will make work easier and allow financing/funding to be easier. 
  • Join a well-articulated farm cooperative: A lot of finance organization presently in Nigeria do not fund individuals anymore because of the risk of not returning investment, being in a farm cooperative makes financing easier to get. Bank of agriculture fund majorly farm cooperative. Microfinance banks have more interest in farm cooperatives than individual’s farms.  
  • Apply for different grant opportunities and loans that suit your farm solutions: There are different grant opportunities in the world while some are for agricultural technology solutions, some are for agribusiness ideas. Orange corner program, Slingshot, Kickstart, Tony Elumelu Foundation, Nourishing Africa, Gogettaz and lots more. All of these can be done excellently well if all of the above are well followed.

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