One of the causes of this disparity is that a majority of the farmers have little or no access to formal financing or adequate financial services. Due to this lack of access, most rural poor, youths and low income farmers rely on costly informal sources of finance such as input supply credit, or self-financing. This hinders them from taking full advantage of economic opportunities in agriculture and agribusiness.
Financial institutions such as commercial banks and microfinance institutions, can help in financing agriculture by expanding operations into the rural areas, reviewing their lending terms and conditions to the level these smallholder farmers can meet up.
What is Agricultural Financing?
Agricultural financing is a concept that comprises financial services for Agricultural production, processing, and marketing. It includes short, medium, and long term loans, leasing, savings, payment services, and crop and livestock insurance. The concept of agricultural value chain finance emphasizes the vertical dimension of agricultural finance between different segments of agricultural value chain.
Importance of Agricultural Financing
Small scale farmers and entrepreneurs in general require financing due to the small nature of their businesses which limits their finances. They therefore need external funding in form of credit to implement their business plans. Some of the reasons for credit or additional financing for farmers include:
Expansion of the business in order to generate more profits.
To meet production targets set by the entrepreneur. This will mean additional funding
To be reduce risks of cash squeeze during the production process.
To enable the entrepreneur obtain better prices for his products through storage for sale at a later date when prices are right.
For acquisition of better production and processing technology that will improve quality and quantity of produce for higher profits.
Sources of Funding for Agribusiness in Nigeria
Basically there are two major sources of agriculture finance in Nigeria
- Informal sources
- Formal sources
Informal Sources of Funding for Agribusiness in Nigeria
The informal sources of finance for agribusiness which are mainly available for rural farmers include:
Personal savings
Family and friends
Cooperatives (Esusu Ajo, etc)
Local money lenders
These sources only meet the immediate needs of farmers, even though in small quantity and very expensive. They are also easily accessible to these small agribusiness than the formal sources.
Formal Sources of Finance for Agribusiness in Nigeria
The formal sources which are both the government and private financial institutions provide formalized form of credit facilities to meet production, processing, marketing and consumption needs of the agricultural entrepreneurs.
Some of the public institutions that provide such services are:
Bank of Agriculture (BoA)
Bank of Industry (BoI)
Small and Medium Enterprise Development Agency (SMEDAN)
Nigeria Incentive-Based Risk Sharing System for Agriculture Lending (NIRSAL)
The private formal sources finance for Agribusiness in Nigeria include
Commercial banks through:
Agric Credit Guarantee Scheme Fund (ACGSF) and RUFIN
Microfinance banks
Other Fintechs
How to Manage Your Agribusiness Finances
It is important for an entrepreneur to know how finances business finances can be managed for better profits. This will ensure success and better repayment rates. The following are ways to better mange your agriculture finance:
Have good record of all your activities. This helps in guarding against mistakes of the past, of you have been mismanaging your business finances. It also forms the basis for bank loan and budget preparation.
Plan very well on how to use the financing through proper business plan and good budget for the implementation of the plan. This should be following religiously for success.
Avoid diversion