Innovative Financing Models for Youth in Agribusiness

Introduction

Youth have the potential to contribute to food security, economic development, social inclusion and stability in Uganda. But sadly, three of every four youths in Africa live on less than USD 2/day (African Economic Outlook 2013). While there have been multiple calls for youth to engage in agribusiness, a few African youth have access to financial services and products at an affordable cost, such as savings, loans, insurance, and payment systems. In 2014, 20.5% of young African adults (aged 15-24) held an account at a formal financial institution – including banks, credit unions, MFIs, SACCOs and post banks – compared to 33.1% of older adults (aged 25 and above). Few youth also have access to formal savings. In 2011, only 10% of African youth saved in a formal financial institution, with a slight increase to 11% in 2014 (Demirguc-Kunt, et al., 2015).

For Uganda and other developing countries to achieve their development goals, financing youth in agriculture is a must. This article presents financing mechanisms that are beneficial to young agripreneurs with sound mechanisms that improve access to finance for young people that wish to become more involved in agriculture or to expand their existing agribusinesses.  

Contract Farming: Contract farming is form of vertical coordination between growers and buyers-processors that directly shape production decisions through contractually specifying market obligations (by volume, value, quality, and, at times, advanced price determination); provide specific inputs; and exercise some control at the point of production (i.e., a division of management functions between contractor and contractee. This institutional arrangement often involves, on the buyer side, financial and technical assistance to producers; the pre-established agreements between the parties can be formal or informal but still binding (Miller and Jones, 2010). Contract farming helps young people in primary production of value chain access funding in terms of inputs and technical assistance.

Crowdfunding: Crowdfunding is the practice of funding a project or venture by raising monetary contributions from a large number of people. In 2015, it was estimated that worldwide over US$34 billion was raised this way. Crowdfunding uses the internet to connect borrowers with multiple individual lenders or donators. Crowdfunding allows people to provide loans to low-income and underserved entrepreneurs and students. This creative innovation is spreading rapidly across the developed and developing world and into sectors such as agriculture and agribusiness. Examples of crowd-funding sites include Kickstarter, GoFundMe, Crowdrise, Kiva, Akkabo and Plumfun among others.

Challenge funds: A challenge fund provides grants or subsidies with an explicit public purpose between independent agencies with grant recipients selected competitively on the basis of advertised rules and processes who retain significant discretion over formulation and execution of their proposals and share risks with the grant provider. Challenge funds are important potential sources of finance for youth involved in agribusiness, and are currently being implemented in Uganda and rest of Africa. They are usually supplemented with capacity building activities in business skills, mentorship and entrepreneurial skills. Among the challenge funds operating in Africa is the Africa Enterprise Challenge Fund (AECF), The MasterCard Foundation’s Fund for Rural Prosperity and the YouthStart project among others.

Investment Clubs: An investment club is a group of people who pool their money to make investments. Usually, investment clubs are organized as partnerships and, after the members study different investments, the group decides to buy or sell based on a majority vote of the members. Investment clubs provide members a means to learn about markets, while meeting and working with people who have similar interests. A number of banks have established investment clubs in Uganda.

Angel Investors:  An angel investor also known as a business angel, angel funder seed investor is an affluent individual who provides capital for a business start-ups.  This is usually done in exchange for convertible debt or ownership equity. Angel investors often invest through groups or networks. These provide due diligence, extra research, access to potential deals and shared expertise that one person operating alone generally doesn’t have. A small but increasing number of angel investors invest online through equity crowdfunding or organize themselves into angel groups or angel networks to share research and pool their investment capital.  Angel investors can be a good funding source to consider for youth in agribusinesses. However, it is important to note that Angel investors don’t write blank checks. They’ll want to see progress and a way to exit the deal down the line with meaningful profits. So expect angel investors to do a lot of research and careful investigation into your business plan.

Accelerator programs: Accelerators are organizations that offer a range of support services and funding opportunities for startups. They tend to work by enrolling startups in months-long programs that offer mentorship, office space and supply chain resources. More importantly, business accelerator programs offer access to capital and investment sometimes in return for startup equity. Startups essentially ‘graduate’ from their accelerator program after three or four months — which means that development projects are time-sensitive and very intensive. Being part of accelerator program provides youth with start-ups opportunities to access free business expert knowledge and financing. Notable accelerator programmes include Impact Booster Accelerator Programme by ICCO and The East Africa Agribusiness Accelerator among others.

Business Incubation: This is a unique and highly flexible combination of business development processes, infrastructure and people designed to nurture new and small businesses by helping them to survive and grow through the difficult and vulnerable early stages of development. Since startup companies lack many resources, experience and networks, incubators provide services which helps them get through initial hurdles in starting up a business. These hurdles include space, funding, legal, accounting, computer services and other prerequisites to running the business. By joining incubation, young people with start-ups are able to access help with business basics, networking, marketing assistance, market research, internet access, help with accounting/financial management and access to bank loans. Examples of organisations providing incubation services in Uganda include the Uganda Industrial Research Institute, FINAFRICA, Afri Banana Products and The Consortium for enhancing University Responsiveness to Agribusiness Development Limited (CURAD) among others.

Warehouse receipt systems: A warehouse receipt system can provide a solution to the lack of assets that limits small and rural young farmers from accessing traditional capital. Warehouse receipt systems allow farmers to store goods in return for a receipt. This means that they can sell their produce at a later time, when prices aren’t slumped due to high supply. In addition to providing a secure place to store produce, young farmers can also collateralise their warehoused commodities to cover credit from financial institutions. As an innovative credit tool, warehouse receipt systems, among other benefits, reduce the pressure on the farmer to sell the commodity immediately after harvest, when prices are normally low and reduce post-harvest losses.

Venture capital: Venture capital (VC) is a type of private equity, a form of financing that is provided by firms or funds to small, early-stage, emerging firms that are deemed to have high growth potential, or which have demonstrated high growth in terms of number of employees, annual revenue, or both. Many of the best-known entrepreneurial success stories owe their growth to financing from venture capitalists. VCs provide large sums of money, advice and prestige by their mere presence. Just the fact that you've obtained venture capital backing means your business has, in venture capitalists' eyes, at least, considerable potential for rapid and profitable growth. In Uganda, some of the VC funds include Root capital, Pearl Capital, Novaster Ventures, GroFin Uganda, Fanisi Capital and Venture Capital for Africa among others.

While there are a number of financing models for young people in agribusinesses, there are a few things young people in agribusiness need to do to be funding ready.

First and foremost, it’s important to put in place a strong business plan including draft financials. A smart plan will look to incorporate what the funding needs of that business will be and when they will be required as part of the business growth journey. The plan and the forecasts should match up, so if the plan is to get funding to buy a piece of equipment, the impact of its use and its cost to the business should then be incorporated.

Secondly, it is important to carry out market research. Market research is the verifiable data that demonstrates the need and viability for your idea. Without it, your idea may only be good in theory. You might have to pay to get access to the data you need, or perform some research yourself, but you need to have this numerical grounding if you want to prove your potential worth.

SMEs need to have in place clear financial models. While these should be a natural part of your business plan, savvy investors require clear details. Therefore, it is important to have full spreadsheets of projected costs, acquisitions, sales and revenue, including profit margins, growth rates and when the business is expected to become profitable. Proper business records are needed.

It looks good to potential investors if you already have some skin in the game. Take whatever savings you can spare and gather up some initial capital from friends and family to show investors you already have some financial backing.