Financing a business can be tricky.
The first thing you need to be very realistic about, is that money is not coming to find you. You have to put in some work to research all the available options in your country and around the world. Then it is going to take more work filling in forms, gathering documents, designing campaigns and convincing people to give you the money you need.
After you get the actual money, it is going to take dedication and a strong plan to turn a bigger profit, so you can reward the people or institution who trusted you with their money.
When you decide to get finance, you should have a clear goal or project in mind. Use the money to bridge the gap as you build your client base and source contracts, so you can get to a point of profit. Or use it to increase capacity and grow your business to get to a higher profit point.
Don’t get finance to pay for running costs if you don’t have a strategy and timeline to turn it into profit.
Debt / Loans
There are many different types of loans that can help finance your business development. A formal loan will almost always require:
- a clean credit record
- a detailed business plan
- security/collateral equivalent to the amount being borrowed
- proof that you are able to afford the repayments on a loan
When you apply for a loan, the organisation providing the money wants to know if you will pay it back. This is a big stumbling block for smallholder farmers who work in informal cash economies.
To solve this problem, companies like AgroCenta in Ghana uses their apps to let farmers make and receive digital payments. By formally keeping track of the transactions they build up documented proof to reduce the perceived risk lenders and investors have towards farmers. In Nigeria, Babbangona also uses their platform to de-risk agribusinesses.
Building up evidence that of your business transactions is a good place to start if you would like access to debt finance
1. Economic Development Loans
Economic development loans are created to stimulate growth in a specific industry or location, or to support the economic inclusion of people who have not historically had the same access or rights to do business, like female business owners or disadvantaged minority groups.
Because many governments see agribusiness as a key element of economic development, there are many dedicated banking institutions that only provide finance for agribusiness development. The Land and Agricultural Development Bank of South Africa is one such example, and earlier this year Muluken Yewondwossen of Capital News in Ethiopia reported on a government mandated “agriculture focussed bank in the making.”
There are obvious benefits when you work with a government-backed bank that is only concerned with your industry and making it a success. Research what economic development programmes and institutions are available in your country.
2. Corporate Loans
It can be difficult to tell the difference between corporate financial services providers and specialised banks.
Some large private companies in the agriculture sector provide associated financial services like loans and insurance. An example of this is UNIGRO Financial Services. They are a division of the agricultural services company, Afgri.
The nice thing about dealing with companies that offer loans in your industry is that many of them also provide deeply insightful advice and guidance. Because the institution wants you to succeed so you can pay their money back, getting the right corporate loan from a responsible institution can be more valuable than just money,
Be sure that the person, company or bank that is offering you the loan is reputable and registered with your country’s financial services regulator.
3. Business Loans
Approaching a traditional bank for a business loan will require a really good track-record. Banks don’t like risk. That means startups might find it difficult to get this type of loan.
Forbes contributor Alan Hall has some good advice for businesses who want to get a business loan: “To facilitate the process, engage with the financial institution at the earliest stages of the enterprise–not necessarily for a loan at first, of course, but for a merchant account, credit cards and a checking account. Over time, the bank will become familiar with the company and the entrepreneur will be in a better position to seek additional banking products – including loans – when needed.”
4. Specialised Bank Loans
For agribusinesses some traditional banks provide agricultural production loans that are tailored specifically for the industry. The terms of these loans are much more favourable because they take into consideration the production cycles and delayed profit horizon of farming businesses.
5. Credit Cards
Credit Cards are ONLY an option for very short-term financing. A credit card can be helpful if you need a small amount of money to maintain cash flow and you are definitely going to pay the entire amount back before the payment deadline.
Understand the terms of your credit well before using this option. Although credit cards are often interest-free for 30 days, it is extremely expensive if you miss your payment. If you decide to only pay the minimum amount, you can easily be trapped in a debt-cycle.
Inc.com says, “Factoring is a finance method where a company sells its receivables at a discount to get cash up-front. It’s often used by companies with poor credit or by businesses such as apparel manufacturers, which have to fill orders long before they get paid. However, it’s an expensive way to raise funds.”
If you have a good number of customers who owe you money it can be an easy way to get a percentage of the cash before their payments come in. Bad business practises have given some companies who finance on factoring a bad name. Because they often take over the debt collecting, it can damage your client relationships. Choose wisely if you go the factoring route.
7. Leverage your Mortgage
If you have a home loan and you have been paying diligently for a few years, it is always a good idea to ask you bank to recalculate your interest rate. Mortgages can have a much lower rate than business loans if you have a good credit score. It may be an option to refinance your house and use it as collateral to get money from the bank.
Remember that your home loan is not given to your business, but to you as a person. If your business is bankrupt, the loan still needs to be paid by you. If you are unable to make a success of the business, you risk losing your house.
Equity / Investment
Trading equity for investment means you give a part of your business to someone else in exchange for the money you need to grow. Always do your research. Always use your attorney or legal support to review the contracts, advise you, and guide you. A clever bit of ambiguity in your contract can cost you your company.
8. Angel Investors
Thanks to shows like SharkTank most people are familiar with Angel Investors. They are individuals with access to a lot of money who are willing to take on risk and invest in businesses that show promise.
This type of investment will almost always come with a unique deal and it usually involves signing over a part of your business and giving up some control to the investor. The right investor will bring their experience to the table and may have a valuable network that will benefit your business.
Know who you are dealing with before you jump in.
9. Venture Capital
Fundera.com says “Similar to angel investors, a venture capital firm will swap the capital you need for equity in your business. The difference? A whole company is investing in your business instead of just one individual. Venture capital firms are organizations dedicated to identifying early-stage companies with high-growth potential, and investing in them.”
Venture Capital firms have access to serious amounts of money and they expect serious returns. They aren’t usually interested in small businesses. If you do go the Venture Capital route keep in mind that it is not uncommon for the founders of a company to get worked out of their own company.
10. Partners and Co-Founders
When you bring a partner or co-founder into your business you are building a long-term relationship. Keep in mind, the moment you bring in a partner or co-founder, it is no longer “YOUR business” but rather “OUR business.”
Partners can “bring new, special skills (e.g., technical, marketing or financial) to the business, add new products, patents, property or production capability to the business, or provide new capital to the business,” says the Edward Lowe foundation.
If you trust the person or people you are bringing into your business, and they are serious about building the business, it can be an effective way to take your business to the next level.
The Other Options
There are several ways of getting money that don’t clearly fall in the debt or equity categories.
“The truth is most startups are funded with personal savings. Before you make a big withdrawal, however, I recommend that you have at least a year’s worth of fixed living expenses (like your mortgage and insurance needs) set aside,” says Forbes contributor, Kerry Hannon.
Personal savings are a great option because the only person you need to convince to give you the money is yourself. You don’t have to sign over part of your business to an investor, and you won’t have the extra costs from paying interest on debt if you take a loan.
However, when you use your savings, you are taking all the risk. Years of hard work to build up your saving can be lost in months if your business doesn’t work.
12. Friends and Family
“Hitting up family and friends is the most common way to finance a start-up. But when you turn loved ones into creditors, you’re risking their financial future and jeopardizing important personal relationships,” says Inc.com
Your father may be willing to loan you money at zero interest without any paperwork because he really wants you to succeed. But it is better to establish clear expectations and clear terms of repayment. In addition to paying back their initial investment, you can choose to reward your family and friends with interest on their money, products or services from your company, a share of the profits, or equity in your company.
“A business grant is a sum of money given to a business in order to help them further their business. They’re usually distributed by governments, corporations, foundations, or trusts. Unlike many other types of business funding, grants don’t have to be paid back and business owners aren’t required to give up equity in exchange for a grant,” says Startups.com.
Finding grants will take research. There is no single list that tells you about all the grants your business may be eligible for. If you have a drone crop-spraying business in Tanzania, you have to research grants in technology, agriculture, agritech, Tanzanian agriculture development, small business, drone-business development, UN grants, AGRA grants, Global Agriculture and Food Security Program grants, entrepreneurial grants and more.
A few good places to start your research is:
The rise of digital crowdfunding platforms is giving new hope to young businesses who need access to public investment. They can also be a great opportunity for new investors who want to support businesses and ideas that might make it big.
Online platforms like Kickstarter and IndieGoGo have been around for more than a decade. The idea behind crowdfunding is to get small amounts of money from a lot of different people. Usually, the investors get a reward, like a free product, when your idea takes off. There are also donation-based and equity-based funding models.
An exciting development in the African crowdfunding space is the development of agriculture and agrifood focussed crowdfunding platforms. Nigerian FarmCrowdy is perhaps the most famous. And platforms like AgriZoom in Congo, Brazzaville, and BaySeddo 2.0 in Senegal are changing the game for agripreneurs who need micro-investments for their businesses.
See which local and international crowdfunding platforms are operating in your country, put together an eye-catching proposal, and leverage the power of social media to get finance.
The competition circuit can be lucrative for businesses that have an impressive hook. If you are doing something exciting, new, strange or topical you will stand a good chance of catching the judges’ eye.
For competitions, remember that you don’t lose, when you don’t win. The real goal for entrepreneurs should be to make it to the finals. The media exposure, social proof and links to your company profiles and website is the real value. When you get to the finals of a competition, possible investors and future corporate partners may notice your business.
Among our 2019 Gogettaz Agripreneur Prize finalists we have three great examples of this. Ecodudu also competed in the finals of the clim@ competition. FarmCorps is one of the finalists in the UNDP Cultiv@te Challenge. And Alley Capital Group was one of the winners in the African Drone Business Challenge.
If you are going to do the work to enter one competition, why not enter as many as you can? There are literally hundreds of competitions happening every year. You will have to put in the research, but here is a good starting point:
Ikenna Odinaka, the founder of AfterSchoolAfrica.com put together a handy list of business plan competitions and awards that are open to African entrepreneurs. And the Agorize platform is host to a continuously updated list of global challenges.
Some notable competitions that agripreneurs should consider are
- Alibaba founder, Jack Ma’s Netpreneur Prize
- Pitch Agrihack
- Seedstars World Competition
- Thought for Food Challenge
Entries are still open for the GoGettaz Agripreneur Prize Competition, but time is running out. Applications close 18 June 2020.
If you have a business in the agrifood industry, enter the GoGettaz Agripreneur Prize Competition today, and YOU could win US$50,000 to launch grow or scale your business.