Estimated reading time: 7 minutes
- South Africa boasts a robust and resilient financial services industry, with ample deposited funds available for lending.
- Despite these favourable conditions, many small and medium agribusinesses struggle to access finance for several reasons.
- The inability to prove their experience and competence in handling borrowed funds is a key challenge faced by borrowers.
- Another hurdle is the capacity to repay loans. Security shortfall is a common issue among small and medium enterprises.
- Nevertheless, there are inspiring examples of young people who have begun with small gardens or a few animals and are progressing.
South Africa boasts a robust and resilient financial services industry, with ample deposited funds available for lending. The banking system is sound, enabling favourable lending rates and terms for borrowers, while effective systems exist to manage the lending process and minimise losses. Policies are in place to safeguard depositors and prevent borrowers from taking on unsustainable debt.
Dr Langelihle Simela, agribusiness development manager at Absa, says despite these favourable conditions, many small and medium agribusinesses struggle to access finance for several reasons.
Proof of experience
According to Dr Simela, the inability to prove their experience and competence in handling borrowed funds is a key challenge faced by borrowers. This proof includes detailed records of business expenditure, income and performance, financial transactions, production and sales from the business since its inception. These records, especially with regard to how much money was spent in the business, the income generated and how this was used, must be kept in a safe place from day one.
In addition, a clean credit record is crucial and must be maintained. This includes all store, cellphone and other accounts, as well as mortgages. Inexperienced borrowers are also advised to seek help from reputable technical support programmes, and most major off takers offer this type of support.
Read more about women in agriculture written by Christal-Lize Muller here.
Ability to repay a loan
Another hurdle is the capacity to repay loans. A well-structured business plan that aligns projected cashflows with historical performance is vital in this regard. Dr Simela says the business plan should demonstrate that the business will generate sufficient cashflow to repay the loan as well as interest. Lenders prefer businesses with cash reserves, emphasising prudent financial management during the initial years to ensure repayment capability.
A business needs to have some cash reserves. This implies that business owners should be pennywise in managing their income in the first few years, focussing on growing the business.
Security secures the deal
Security is a guarantee that a loan will be repaid if the business fails to pay back the loan for some reason. Security shortfall is, however, a common issue among small and medium enterprises. To address this, banks explore alternatives such as credit-guarantee schemes.
It is worth noting that security does not replace proof that a business can repay the loan. It only comes into play should a business fail. Thus, banks will always consider alternative security for well-managed businesses with good repayment ability.
Economic concerns
To deal with a harsh economic environment, producers should prove that they are managing their operations in such a way as to maintain exceptional biosecurity to prevent outbreaks of disease on their farms. Producers also need to demonstrate that they are part of a strong value chain that is resilient to shocks.
Fortunately, there are development programmes that support producers to the point that they have thriving and sustainable businesses. Such programmes should endeavour to help producers address the matters raised here so that by the time they approach banks with their applications, they have a better chance of success.
Growth stage adaptability
Dr Simela says appropriate financing solutions depend on the business’s growth stage (Figure 1). Loans from commercial banks are generally not suitable for start-ups, especially in agriculture, where managing the business is compounded by unpredictable natural challenges. Early-stage funding should ideally come from personal savings, grants and/or angel investors. Angel investment involves borrowing money from family members or individuals who believe in the entrepreneur’s business, and are willing to offer flexible repayment terms, even forgiving the debt if unforeseen setbacks arise.
Figure 1: Growth phases of a business and potential funding sources. (Source: Dr Langelihle Simela)
As the business expands and begins to show signs of success, venture capitalists become optimal investors. They inject funds from external sources into the early-stage business that exhibits growth potential. As the business progresses and achieves financial stability, concessionary loans become more appropriate. When the business is thriving, growing, and looking to expand further, loans from commercial banks become a suitable financing option.
She adds that while South Africa has ample funds for start-up agribusinesses, there is a need for better co-ordination of funding sources to enable entrepreneurs’ progression from start-up to fully established commercial enterprises. Currently, a significant portion of our development funds is directed to the same recipients, without adequately preparing them to transition to the next phase.
This approach creates a bottleneck, with a select group of recipients continually benefiting from development funding without advancing, thereby limiting resources available for new entrants. Consequently, a sense of discouragement concerning our ability to effectively finance and sustain developmental initiatives arises.
Co-ordination of finance
Given the array of funding sources available in South Africa, Dr Langa proposes a co-ordinated approach (Figure 2). Grants should predominantly aid new entrants with promising agribusiness enterprises. As these enterprises mature, support should come from diverse development funding pools and soft loans, such as enterprise and supplier development funds, loans from development finance agencies, and other entities offering developmental terms. Ultimately, entrepreneurs should become eligible for commercial loans.
Throughout this growth trajectory, entrepreneurs should receive guidance to develop sufficient expertise in production, financial, and business management, enabling them to operate independently. This approach should enable South Africa to assist more entrepreneurs in establishing viable and sustainable agribusiness enterprises.
Figure 2: Proposed funding phases for South African agribusinesses to enable the transition from start-up to established commercial enterprises. (Source: Dr Langelihle Simela)
Pay attention to inclusivity
The agriculture sector is often criticised for its lack of inclusivity toward women and young people. Consequently, it is imperative that developmental programmes consciously prioritise the involvement of these groups. Women encounter societal obstacles hindering their access to resources. Nevertheless, it has been consistently demonstrated that with the right opportunities, women can successfully manage thriving agricultural enterprises.
A compelling example is Maria Tswayi, a graduate of the Sernick Emerging Farmers Programme, whose meticulous application of her acquired knowledge has resulted in high calving rates and the growth of her Bonsmara herd. Tswayi farms in the Hertzogville area in the Free State and her achievements have earned her recognition from the Free State government and Livestock Registering Federation (LRF) Stockman School. It is essential to give deliberate attention to empowering such women, thereby promoting their active inclusion and advancement within the agricultural industry.
Dr Simela says despite constraints, a growing number of young individuals are aspiring to become entrepreneurs in the agricultural sector. Regrettably, they face challenges in accessing high-quality experiential learning opportunities and encounter difficulties in securing capital to initiate their agricultural endeavours.
Nevertheless, there are inspiring examples of young people who have begun with small gardens or a few animals and are progressing. Developmental programmes as illustrated in Figure 2 should actively identify and support these youths, as they represent the agribusiness entrepreneurs of the future. Recently Absa launched a first-of-its-kind banking solution that is specifically designed with women and young business owners in mind. Respectively called Absa Business She Thrives and Absa Emerging Entrepreneur, the solution offers a monthly fee waiver for six months on a new Business Evolve account, working capital funding at a 0% initiation fee as well as access to alternative lending solutions up to a maximum of R5 million under our Enterprise Development programme. Embedded in the offer is a short-term insurance benefit with up to 35% discount on premiums. – Christal-Lize Muller, Plaas Media
For more information, phone Dr Langelihle Simela on 060 991 0395 or email langa.simela@absa.africa.
