Ask Ag About... Access to Finance for Small and Growing Businesses

Event Date: Oct 27, 2016
Time: 12:00 PM to 01:00 PM (GMT -4)
Location: United States
Online: Online Event
Event Links:
Information
Having access to finance is crucial for facilitating expansion and scale of small and growing businesses (SGBs). SGBs are commercially viable businesses with significant potential for growth that seek growth capital from $20,000 to $2 million. However, accessing growth capital in this range is a major challenge, particularly in emerging markets.
Join our upcoming Ask Ag online chat where financing institution experts and field practitioners will delve into the complexities of access to finance, as well as examine key factors for success, best practices and lessons learned.
For one hour, experts will answer your questions and discuss best practices, common challenges and lessons learned in their own development work involving access to finance. It all takes place right here in our Comments section!
If you arrive early, post a question for our experts right now in the Comments section below, and/or return to this page on October 27th from 12-1 p.m. EDT to engage in the live discussion.
1. What are the critical components of accelerating investment-readiness for small and growing businesses? What are key factors for success in this process?
2. From an entrepreneur’s perspective, what are the pros/cons of debt vs. equity financing? What does the pursuit of external financing look like for an entrepreneur?
3. How do financial institutions determine investability? What are the most common factors that make or break a loan/equity investment?
Ask Ag About... Access to Finance for Small and Growing Businesses

Based in New York, Martin Slawek works on the Investments team for the Initiative for Smallholder Finance (ISF). Martin is responsible for research and complex financial, market and policy analysis, along with investment pipeline... more generation. He has extensively worked with agriculture companies, agriculture startups, banks, governments, foundations and impact investors. Previously, Martin was an Investment Banker covering structured finance at Bank of America Merrill Lynch. less

Giselle Aris is Practice Area Manager for Inclusive Finance and Enterprise Development at Land O'Lakes International Development. She provides technical leadership in the design and execution of projects across Africa and Asia,... more with a particular focus on leveraging philanthropic capital to crowd in private investment for social impact; accelerating the investment-readiness of small and medium-sized businesses in emerging markets; and financial modeling for the social sector. Giselle is currently completing her MBA at the Wharton School, University of Pennsylvania and is an Investment Associate at Wharton Impact Investing Partners. Prior to joining Land O’Lakes Giselle worked in India’s dairy sector for two years, where she led the design and profitable scaling of a farmer-owned dairy business. She has also worked with the United Nations Department of Economic and Social Affairs, Women’s Campaign International and the U.S. Department of State Africa Bureau. Giselle holds a master’s degree in International Development from the University of Oxford, where she was a Thouron Scholar, and a summa cum laude bachelor’s degree in African Studies from the University of Pennsylvania. less

Titianne Donde has extensive knowledge in developing and implementing sustainable inclusive growth models, value chain analysis, mapping and finance, agriculture and rural product development, institutional strengthening and... more sectorial policy reform. A former banker with over seven years' experience in the industry, Titianne is currently Chief-of-Party for the flagship Feed the Future Kenya Innovation Engine, funded by USAID. Here she has overseen the growth of the project to support small and medium enterprises develop and pilot innovative solutions for food security and improved livelihoods. With almost five years’ prior development sector experience gained in various roles at DAI Development Alternatives Inc., Titianne helped facilitate micro-enterprise access to finance and develop products and agricultural lending policies and financial strategies for over 100 institutions through USAID's Financial Inclusion for Rural Microenterprises (FIRM) project, during her tenure as Technical Team Leader. She previously managed the project’s financial sector policy and regulation reform pillar to capitalize on opportunities that benefit marginalized and excluded populations across the Kenyan society, including women and youth. Titianne holds a Bachelor of Business Administration and an MSc in Entrepreneurship. less

Jason Wendle is the Director of the Learning Lab, tasked with guiding the Lab to produce actionable and collaborative learning that leads to real impact for clients. He helped design the Learning Lab as an Associate Partner in the... more Nairobi office of Dalberg, where he spent 7 years providing strategy advice to clients in agriculture development, access to finance and other sectors, prior to transitioning to GDI in Washington, DC to direct the Lab. During his time at Dalberg, Jason provided leadership to Dalberg's evaluation and learning work on the continent. He led teams to develop learning frameworks, design data collection approaches and evaluate investments; always with the aim to translate learnings into actionable recommendations to increase impact going forward. Jason holds an MPA/ID from Harvard's Kennedy School. He has published and presented on smallholder finance, SME banking and impact measurement. less

Scott is a senior project manager focused on strategic initiatives at the cross-section of Root Capital’s lending, advisory and field building activities. These include mobile technology advisory for Root borrowers, as well as... more fund design and management for mission-aligned investors. Prior to joining Root Capital in 2014, Scott was a consultant with FSG where he helped companies design shared value strategies to drive financial, social and environmental returns. He has also worked with the Peace Corps, the Overseas Private Investment Corporation, TechnoServe and the social enterprise Razoo.com. Scott is a graduate of Columbia Business School and Harvard Kennedy School and currently lives in Cambridge, Massachusetts. less
Comments
Getinet, these are both critical questions. In terms of availability of finance, a few thoughts: 1) From an investor perspective, the issue is often that finances are availability, but comfort level with SGB investment opportunities is not. In other words, the question becomes, how can more SGBs become more investable, and thus more appealing to people and institutions with financing available? 2) Networking is critical. SGB financing is still largely focused on key urban hubs (e.g. Nairobi), with less knowledge about and linkages to SGBs in rural and peri-urban areas. To help facilitate access to finance for these non-metro SGBs, facilitating networking and encouraging visits to business sites is useful.
Your second question, about efficient utilization of funds: as with all financial resources, planning is key! A common understanding between the financier and the business about intended use of funds (and mutual agreement about extent of flexibility), milestones for tracking progress, monitoring and a plan for action of milestones fall behind help set the stage not only for fund utilization, for for long-term relationship building.
The two trillion dollar question!
- Loan guarantees are certainly helpful - particularly if you're operating in difficult geographies/environments, very early stage businesses, and first-tme borrowers.
- Collateral is helpful to an extent - as pricing it, writing it into an enforcable contract, and calling on it can be complex, time-consuming, and expensive.
- Lending against purchase orders (trade credit) can be effective - particularly if you know the buyers well.
But none of the above ensure repayment without transaction costs! If you're looking to make your money back without taking a lot of risk, it probably means investing via a financial intermediary - impact oriented or otherwise - in a sr. debt tranche.
Due to the nature of agriculture lending, managing transactional costs is an uphill task. However to keep it manageable, one must invest in market led product development and match the credit cycle with the crop cycles. In some instances this might require you to accept ballon payments at the end of the cycle and after farmer payments have been effected. One might also consider having the farmers pay the interest bit of the loan only for the time before harvest, and settle the principal and remaining interest post harvest and sales (moratorium on the principal). This works best if the farmers are organized under a cooperative or buyer/aggregators.
Reform of Secured Transactions laws will enable small business to offer collateral (other than land) to the lender as security. We are frequently asked (by both borrowers and lenders) about practical implications of such reforms for the use of livestock as security. Any examples of how that actually works in practice in the developing country context would be much appreciated.
Hi Jeannette, a bit more context might help here. In which country are you referring to reform of secured transactions laws? There are examples of debenture and other alternatives to traditional collateral in many countries in Africa where I was based. In the case of the livestock, the business model of Juhudi Kilimo for example is asset-financing for livestock, e.g. a $1000 loan for a cow where the cow itself is the collateral.
http://juhudikilimo.com/
Thanks for your reply, Jason. I had a quick look at the website - it is not clear, but appears to be an NGO? I am eager to examine the website more closely later on to see how the loans operate. Would this work for commercial banks? We have a "Model Law on Secured Transactions" for use by OAS member states (ie., Latin America and Caribbean) interested in reform of their legislation to enable the use of non-traditional forms of collateral (including livestock, crops, etc.) I would appreciate references to any resources about how this is actually done in practice. i.e., if the cow is the collateral for the $1000, both lenders and farmers want to know, what happens if the cow dies, is stolen, or ends up in a stew? etc. Livestock is not like other inventory that can be seized and sold in the event of default. Answers to such pragmatic issues, much appreciated. (sorry, I've been looking at these issues from the perspective of "legal doctrine" - a bit far removed from the field and I want to understand the pragmatics.)
.
Juhudi Kilimo is a social enterprise akin to an MFI, but definitely looking to be profitable in what they do. (I will warn them however that their website appears NGO-like :) They combine livestock asset lending with a group-based model. It's true that it is very hard to repossess a cow, for example because of the cultural implications of losing your cow. Sometimes the group will come together to prevent that from happening, but I do believe it is possible to re-possess in the extreme cases. As with any asset-financing model, the lender has to have a least some understanding of that asset. In this case, Juhudi started with cows from the beginning of their business model, and they insure them to cover the risk of health problems/death. The cows usually produce enough milk to basically cover the loan payments, which happen over one year, so default rates are very low. They are usually happy to talk about their model, btw.
In Kenya, institutions that use livestock as security, apply it when the loan is actually for asset finance to buy that particular livestock. The livestock is tagged and insured during the loan term and can be recovered incase of default. Livestock is rarely used as collateral esp by small holder farmers (emotive, hard to enforce)
Thanks, Titianne, that makes sense and is what can be referred to as a "purchase money security interest" - where the loan is used to buy the very collateral for the loan itself. I guess I was hoping there were also additional options...
My partner and I are seeking funding to set-up a Solar Powered Refrigeration product and monitor the results of how much of the crops grown in a regin can be saved versus what is now lost without access to refrigeration because there is no access to electricity. We have a non-profit organization in Guatemala that we would work with to insure that we include input from the local farming community and adjust the unit as needed to meet their needs. We would donate the unit to the local community after we complete the study. Our goal would then be to intorduce the product to those areas of the world without access to fulltime electric power. We are seeking $1 Million to be able to perform this study and to donate the unit once this study is completed. Is this a project we can obtain funding for?
Thanks and Regards,
Bruce Rubin
While not in Guatemala, it's worth noting that there are lot of big initiatives right now targetin post harvest loss, which will include investing in private sector solutions. One really interesting new one is YieldWise, a Rockefeller Foundation initiative in Africa: https://www.rockefellerfoundation.org/our-work/initiatives/yieldwise/
Hi Bruce, private sector funders expect monetary returns.
As your project is more social and research inclined (for now), your best bet for financing will be a development partner who would invest for the benefit of the community and their ROI would be the impact on the farmers from your project. You would then use the data to develop a for-profit model and scale to other regions
Hi Bruce, private sector funders expect monetary returns.
As your project is more social and research inclined (for now), your best bet for financing will be a development partner who would invest for the benefit of the community and their ROI would be the impact on the farmers from your project. You would then use the data to develop a for-profit model and scale to other regions
Balancing the financial and social returns of this missing middle category -What type of blended financial vehicles have been most successful in accelerating SGBs to cover the costs of administering TA etc? i.e. those elements which are critical to success yet less able to provide a financial return for an investor.
A function that has increasingly being used (e.g., the Tropical Landscape Bond in Indonesia) is setting up two separate facilities - a fund facility dedicated to actual investments, and a separate TA facility that raises and they deploys technical assistance monies to on-ground partners (enables the money to be earmarked). The TA facility acts as a de-risking mechanism and strengthens the actual investment deployment. Another resource to look at for blended finance instruments is the Canadian funded platform, Convergence.
Building off Martin's comment, Root offers financial management training to the majority of our clients - a necessary step to both protect our own investment but moreso to improve business operations among borrowers and maximize their earning potential. To date, these services have been almost entirely grant funded - particularly for first-time borrowers. We're pleased to see that new funds in this space often include dedicated funding for TA.
Mark, thanks for the great question. Like Martin, I also encourage you to check out Convergence - a platform for facilitating blended finance and also the development of new product/vehicle design. In my experience, funds often have parallel TA facilities (e.g. Africa Agriculture and Trade Investment Fund, Fund for Agricultural Finance in Nigeria) - which are often grant funded. The PRI model has also been used to cover initial TA costs. Many investors have noted the importance of TA in improving and expanding the investment pipeline, but I have seen few instances so far where the financing side has talked about investing in TA directly.
Stepping back from the question of blending capital for TA specifically, and just thinking about the need for what we call "smart subsidy" in spaces that are high impact with risky returns, there definitely can be a role for credit guarantees in making finance available to SGBs that they otherwise couldn't access. USAID's DCA is a good example of a 50-50 partial credit guarantee that I've researched and found successful in a number of cases of getting financial institutions to venture into the SGB lending space. The 50-50 ensures that financial institutions have some skin in the game and thus see SGBs as a strategic priority, but provides some cushion for the risk of investing in high-impact, high-risk businesses.
Great point, Jason, completely agree. On the smart subsidy, if anyone is interested, we (the Initiative for Smallholder Finance) actually worked with Jason at RAFLL and Dalberg, where smart subsidy was one of the recommendations to move the sector forward (along with progressive partnerships and customer centricity). Link if interested: https://www.raflearning.org/sites/default/files/inflection_point_april_2016.pdf?token=OS8hc14U
Hi all,
We're thrilled to see some great questions and comments ahead of this Thursday's chat! As always, this Ask Ag Online Chat will take place right here in the comments section.
If you would like to post a question or comment but remain anonymous, please email it to [email protected] and we will post it on your behalf.
See you Thursday!
Hi Myriam -
Root launched a dedicated "financial advisory" department after encountering this problem for 6 years with new prospective borrowers. We oftentimes use large workshop formats to help multiple groups better understand the loan application process and put together relevant documentation for our loan officers to review.
Hi everyone! I'm looking forward to this chat on Thursday, and am excited to see that comments have already kicked off. I manage the Inclusive Finance practice at Land O'Lakes International Development, and prior to that, raised financing for a dairy social venture in India. I'm looking forward to engaging with you about how to improve the investability of early- and mid-stage enterprises, and how to successfully attract financing.
Hi all - very much looking forward to a great discussion soon! I work at the Initiative for Smallholder Focus, where we focus on increasing access to finance for smallholder farmers through interventions along the entire value chain (both local and international players). I'm an ex-banker, so know how banks think through risk. SGB financing is inceasingly becoming a viable way to strengthen agricultural ecosystems, so excited to to talk through opportunities and methods to accelerate the sector.
Hi all - Scott Overdyke here from the strategy team of Root Capital - a nonprofit social investment fund that provides loans, advisory services, and market connections for small, agricultural businesses in Africa, Latin America, and Indonesia. Looking forward to today's online chat and any follow-on conversations!
Hi all, looking forward to today's discussion. Prior to starting the Learning Lab, which is particulary concerned with finance for smallholder farmers, I helped set up the East Africa chapter of ANDE and also worked with KFIE. So it's nice to be back in the SGB world for today.
Welcome to this month's Ask Ag Online Chat! We're thrilled to have a great panel of experts online today and look forward to a great discussion on access to finance for SGBs.
As always, today's chat will take place right here in the comments section of this page. Make sure to hit the refresh button to see the latest posts!
Lastly, if you have any questions about participating, email us at [email protected]
Happy chatting!
One thing you see in the SGB world is that it's not always the best ideas or most dynamic entrpreneurs that get invested, but those that are able to organize and professionalize themselves internally in order to speak the language of investors and assuage their concerns about risk. Whether this is the ideal priority or not, if you want investment, getting internal systems right is critical.
Banks and local financial institutions are usually quite interested in participating in the sector, but a critical barrier is the financial maturity of the companies. Banks look for track record and a history (at least a few years) of successful operations (along with a business plan and forward looking projections - in this case, there are some local consulting firms, one in Kenya, that helps promissing businesses become investment ready through business planning support), and ideally other existing financing partners to derisk participation.
Additionaly, they need a pipeline of, in this case, SGBs, to justify participation for their internal credit committees (for department expansion, and even increased internal lending limit caps). If a bank has only 5 SGBs to finance over the coming 2 years, it's hard for them to justify economies of scale to particpate. The upfront due diligence cost is quite high irregardless of amount (in this sector), especially with only 5 companies; however, if you show a bank or syndicate of banks a strong and robust pipeline of investible opportunties over the next 5 years (call it 50 SGBs capable of absorbing financing responsibly in a specific sub-market), they will gladly particpate.
An interesting model is using exsiting pipeline of other actors (such as NGOs or local aggregators) to aggregate pipeline and continue due diligence they're already doing for other projects, and then directing them to local FIs.
Also, important to note that the role of technology has been increasing the ability of financial institutions to evaluate credit risk and offer traditional products and non-banking institutions to offer technology enabled solutions. Alterative credit scoring and technological data aggregation is allowing banks to use traditionally unusable sources of information evaluate the ability of an individual or company to repay a loan. In some cases, it also allows them to control the actual underlying use of product - for example, MKopa allows solar users the ability to aggregate credit through payments, but then can also have it shut down for non-compliance. Therefore, helping SGBs get comfortable using technology based products (and the ability to feed data into them - e.g., automated accounting software, rather than Excel inputs), would be useful in allowing them to access additional products. Important to note, that many of these alternate credit sourcing methods don't require individiduals or SGBs to have technological proficiency. Examples of psyhchometric and behavarial - Arifu, Visual DNA. Ones using geographic, climate, value chain, and market data to assess borrowers - Telephone Farmers, Acre Africa, Geotraceability, MFarm, FarmDrive.
During our first six years of lending to rural enterprises, we came to recognize that access to credit as a stand-alone financial service was often insufficient to spur the growth and success of our clients. Many rural enterprises lack the skills and experience to manage credit effectively (e.g., creating financial statements, budgeting, financial forecasting). In 2006, we launched our Advisory Services program to broaden the funnel of our lending pipeline, support enterprises in our portfolio through targeted training, and enhance the efficiency of loan officer due diligence
Root has identified a number of ‘financial fundamentals’ that we use to determine the strength of an enterprise as well as areas for improvement (via workshops or targeted training). They include financial planning, financial statement creation & analysis, financial risk management, loan application preparation, internal credit management, and farmer financial literacy.
Similarly, as businesses grow, so do their needs for diversified loan products that often demand new management skills to maximize success.
Few things to keep in mind, the business must have a clear and replicable business model. The enterpreneur must have the ability to give a succinct and convincing pitch on their business. They must also have a good understanding of the financial model, including projections (best and worse case scenarios), cost and revenue drivers and ROI
I have two questions...not sure how well they fit with this forum:
1. We've been operating as a nonprofit. However, we are looking at adding impact investments so we can scale our technology at a faster rate. What sort of returns are investers looking for?
2. Even more than financing, one of our more daunting barriers is expanding technology into other countries (a biological ag technology currently in Kenya). Business set-up, registration, permitting, eco- and toxigology-testing, etc., are expensive and take a long time. Is there a way to do a continental registration/permit now that we've jumped through all the hoops in Kenya? Or, do we have to start from scratch in each country?
re: Q1 - the answer is a very unsatisfying "it depends!"
If ACCEPTING impact investment: I'd consider the trade-offs between all the potential benefits of an NGO status (including access to grant funding) versus the terms of a potential impact investment (e.g., access to networks, expertise, quantity of capital) - and all this in the context of how much capital you need for what. We've also seen NGOs with fully-owned, for-profit subsidiaries - spun off for exactly this purpose.
If MAKING impact investments: As it sounds like you have very specific technological expertise, you might be well positioned to advise investment funds, and through them potentially place some capital of your own. This could be preferable to building out an entirely new veritical - investment capacity - which could be a distraction from your core busienss. Using investment/lending partners could also help you get a toe in the water to see if it's a place you really want to develop additional expertise. My two cents!
We do have some impact investment firms that have looked at our technology (e.g. Boundless had us present at a workshop they held for investors this week) and one of our donors is also an impact investor with MCE, etc. So, it sounds like we are on the right track. I'm still not convinced we shouldn't stay in the philanthropic realm a little longer...we still need time to scale up. But, maybe investors like to get in at the basement level?
Hi Claire, thanks for your questions.
1. What returns are investors looking for: the reality is, it depends. The range of impact invesments is large, with some investors expecting market-rate returns and others expecting less in return for the social bottom line achieved. Also note that some impact investors will have specific geographic and/or certain sector preferences, and meeting those alongside return expectations will be important. As you consider adding impact investments, I encourage your organization to think about a) what sectors will you be asking investors to focus on? b) what geographies? c) what rate of return can you offer over the next 5 years? I suggest leaning towards the conservative side at this early stage. Your answers will help you identify the individuals/firms willing to take on the risk/return combination you're offering.
2) To the best of my knowledge, continental registration is quite a ways off. Even within economic communities like EAC, individual country registration and permitting is generally necessary and can be cumbersome. Building in longer-than-expected start-up time for expansion into a new country is generally recommended. Many hoops ahead, I'm afraid. However, showing permits and test results from one country can help accelerate the pace in a neighboring country.
Thank you, Giselle. Do you know if Africa is working on developing more of an EAC structure? I was at SOCAP16 and there was talk of "One Africa"...but I suspect that was more about establishing an attitude rather than actual policy. We'll start crunching numbers for 5 years out (at least for Kenya). Fortunately, we hit a lot of important social bottom line check boxes (smallholders, women, Africa, education, nutrition).
Claire, it's great that your work aligns with a lot of social bottom line issues that resonate with people - you can use this to tailor your investment pitch. In terms of "One Africa," yes, there is interest in creating bridges between entities like EAC, SADC, ECOWAS, etc. I anticipate that in early years this will be about attitude, as you mentioned, freedom of movement if you are a resident in region, and facilitation of trade. For non-local businesses, however, I expect that country-by-country registration will remain necessary for the medium-term.
Agree with Scott on the "it depends". More often than not, what I hear from impact investors or development focused funds, is that it's increasingly not about the rate of return but the amount of risk and their ability to hedge downside contingencies. Depending on the type of investor (running from high subsidized grant funding, to "market rate" debt/equity - which is still below traditional financial returns), they've become comfortable with a trade off for impact for return, which in my mind should not be the case (but a conversation for another time), but what it really comes down what are the different types of risks associated with your business (and how can they control it, and how it interacts with their broader portfolio in terms of sizing, geography, etc.). The pricing they'll use on a development ag investment will be attributed to risk. Typcial returns can range from at cost (grant funding), up to 1-5% (subsizied capital with a guarantee), 5-12% more "market rate" investors in the space. Please note these are highly generalized.
Thank you, Martin. That helps. 0% return sure sounds nice! Our technology has been proven (increased yield in Striga-infested maize plots by 56.5%) and the market competition doesn't exist (there is a new Imazapyr-coated maize entering the market but it will be expensive for most smallholders...and there is a toxic risk). But, it seems clear that scale up is going to take a long time. Giselle's comment about continental registration is a bummer! We are have a safe, affordable solution for Striga (a parasitic weed that 40 million African smallholder farmers are battling, rampant in 18 countries). But, registration has taken 2 years in Kenya. I'm guessing we should hire legal representation before anything else. That will help us determine if we are two years away or 5 years away. It could be that we are in a sub-basement phase still.
When we talk about access to finance for SGBs, how do we make sure on the availability of finance and how to make sure the accessed finance will be efficiently utilized?