Farming is a particularly risky kind of business and for most farmers, finance remains one of the biggest obstacles standing in the way of their progress. Luckily, South Africa a variety of funding options for farmers, ranging from grants to government funding and loans.
Senior agribusiness manager and commercial banking specialist at Standard Bank, Bertie Hamman, says in general business owners utilise money from their own pocket as the initial funding option.
“[This] will typically come in the form of share capital or a shareholder loan. These theoretically differ in nature, [but we] refer to both of these as the owner’s own contribution. While banks provide finance, they often also consider the owners and [their] contribution, and for this reason it is in an important source of funding. There are instances where their own contribution is less, and then there are other cases where the banks will require a larger own contribution.”
Of course, few South Africans have enough personal capital to fund their businesses, so another type of finance farmers can look at, is investor or development finance. Hermann explains that investor or development institutions, as part of a joint venture with the farmer or agribusiness, provide the cash needed to run the business.
“There are examples where development finance institutions provide loans with very liberal or lose terms and conditions to the extent that it appears to be a grant. One should be very careful of these types of agreements, as it inevitably come with some conditions which might end up in the long run to be very onerous.”
Farmers also have the option of taking out a loan from a bank or other third-party credit providers. Loans, explains Hermann, are subject to very specific repayment arrangements and other terms and conditions.
Grants and development institutions
Agriculture is one of the most important sectors in the country, which is why government offers quite a few options for farmer funding. Options like land redistribution for agricultural development (LRAD). Through this programme, previously advantaged citizens can apply for land for the purposes of agriculture, as long as they are able to make a minimum contribution of R5 000 in either cash or labour. You can call agricultural development on 012 319 8495 or land acquisition on 012 312 9600 for more details.
Another government initiative is the AgriBEE Fund. This fund was created to provide previously excluded black business owners with support for their agribusinesses. There is quite an extensive list of criteria for funding from this entity, including the submission of a thorough business plan, a clean credit record and skills specific to the type of business applied for. Have a look at the government website here for more information.
The Alliance for a Green Revolution in Africa (AGRA) offers funding for more than just farming businesses. They also make grants available for agri-dealers, agricultural research organisations, farmer organisations and agricultural non-profits. The grant criteria is quite extensive, however, and applications need to show that their businesses have the operational capability and technical expertise to succeed. Here is more information on the grant application process.
Perhaps the biggest agricultural development fund is the Land Bank. This organisation offers farmers the opportunity to get funding for farm purchases, mechanisation, production, farm improvements and infrastructure development.
As with private banking institutions, the applications are credit profile based. However, the Land Bank encourages farmers to talk to their local Land Bank representatives to find out what their options are if they do not have the necessary credit rating of financial security. You can find their criteria here.
Relatively new to the finance game is FarmSol, where grain farmers are offered interest-free loans and a comprehensive support structure that includes agronomy, mentorship and coaching, financial planning and business management. The services they provide are aimed at agribusinesses that are at least 51% black-owned, and that farm with barley, hops and non-GMO yellow maize. The rest of the criteria is listed here.
The Industrial Development Corporation (IDC) is another organisation that offers funding for agricultural ventures. Their funding aims to expand the sector, reduce imports and drive job creation, amongst other goals. The IDC offers funding for horticulture, animal farming, forestry and field crop processing. Their application process is broken down into six steps, starting with the submission of a well-research business plan. You can see the rest of the steps here.
Of course, farmers can also apply at traditional banking institutions for loans to fund their businesses. Hamman explains that these bank loans usually fit into two broad categories: short-term loans and long-term loans.
Short-term loans are typically repaid over a period of one year or less and tend to get renewed annual, he says. “There are different types of short-term loans, [like] an overdraft facility, which is often a very general-purpose loan and used by the borrower to cover working capital related expenditure such as wages or utility expenses while [they] await the proceeds of crop income, for example.”
Farmers also tend to make use of short-term production loans, typically used to finance agricultural crops. “The proceeds of the loan are used to plant, maintain, grow and harvest the crop. When the crop is sold, then the loan is repaid.”
Long-term loans, Hamman adds, are for purchasing capital or assets you expect to be using in the long term, like buying a farm or a tractor. “As the name suggests, you will be using the assets for a long period of time, specifically for the purpose of generating an income. These loans are also suitable to finance more niche assets such as irrigation equipment.”
Tips and advice
Hamman has the following advice for farmers looking for financing:
Be specific about what you need
The logical but sometimes not so obvious place to start, is to be very specific about what you want to finance, as this will determine the type of finance you should apply for. Also try to determine what financial contribution you can make.
Consult with experts
It is so important to speak to the financial institution before you submit your [application]. Make sure that you speak to [someone who] is knowledgeable, maintain a constant relationship by keeping the financial institution up to date with what you are doing and how your business is performing.
Plan and budget thoroughly
A common error [farmers make] is to be too bullish in their assumptions. For example, you overestimate your profits and end up not being sufficiently profitable or generating enough cash to repay your loan. Or you don’t budget for all your expenses, including your own [withdrawals] from the business.
Plan properly. When things aren’t going exactly as planned, proactively discuss deviations and what you are doing from your side to ensure you can still repay the loan as previously arranged.
Keep accurate financial records
Very importantly, keep your financial records up to date and accurate. This means that you need to keep track of your budget and keep referring back to your budget to explain any deviations.