Ask the expert: What agribusinesses need to consider when looking for finance?
This month we invited Mina Stiernblad – International Business Manager of InspiraFarms – to give us some insights and advice on what agribusinesses need to consider when looking for finance and investment.
Mina’s background is in financial strategy, investment, and financial management. She holds a MSc in Corporate Finance and Financial Management from Lund University, School of Economics and Management in Sweden. During the last four years, she has worked in East Africa focusing on innovative start-ups in the agricultural sector. Currently, Mina leads InspiraFarm’s finance and administration team, with a special focus on business growth and expanding the asset finance facility for our customers.
- What is the first thing an agribusiness needs to do before looking for finance? As an agribusiness looking for finance, the first thing to do is to clearly define your business model and prioritize which area of the business needs investment. This will help you clearly answer the first question a financier will ask, which is “why you need financing?“ The second most important question is what do you need financing for? When answering this question, it is important to mention what type of financing you need—e.g., asset financing, working capital financing or financing of operations. The answers to these two questions will also help you target the right lender for your business.
- What does an agribusiness need to evaluate when comparing financing options? I recommend keeping in mind the following factors when comparing agribusiness finance options for your operation:
- Repayment options: It is very important to understand which repayment terms the lender can offer and that the repayment terms fit within the cash flows of your business. Try to negotiate with the lender to repay when you get paid by your customers.
- Interest rates: Compare interest rates from a number of lenders, and try to work out what your regular interest payment would be. It’s also a good idea to use a business loan calculator to calculate how much the loan will cost in total when it has been fully repaid. When doing this, you can easily compare the various opportunities, and see which is the cheapest option for your business.
- Loan amounts: Check the minimum and maximum loan amounts the lender offers to determine whether a particular loan product is suitable for your business needs. It is a good idea to check the total amount that each lender normally lends, and to make sure that fits with your financing requirements.
- Loan fees: Make sure you are aware of any fees attached to a loan. It is common for the loan to include an upfront application or facilitation fee, but potentially also ongoing monthly or annual charges.
- Loan tenor: The length of the loan is also important to consider. Long-term loans can be very beneficial if your business is seasonal or early stage, as this will give you more time to recover the funds to be able to pay back. The downside, however, is that the longer you borrow money, the more you will have to pay back in interest. It’s important to make sure that the repayments terms are realistic.
- How can an agribusiness increase its chances of being approved? There are a few simple things you can do to boost your chances of accessing financing. Make sure to:
- Understand your financing options: There are myriad agribusiness financing options available to suit the varied needs of agribusinesses. It is very important to understand what type of financing you need and do research around what financing structure that fits your business. If the business financing needs are in-line with the investors financing options the likelihood of getting approved for financing will increase. Try to avoid the pitfall of spending time with lenders that are likely to reject your application. A good tip is to ask the lenders directly or research if they have been lending to similar businesses previously. If you work with investors that understand your business they will help you structure the repayment schedule to your needs, which will also increase your chances for approval.
- Compare financial organizations and financial products: Once you know the type of financing you need, look at and compare multiple business financial products from a variety of financial organizations. Look at interest rates, fees, repayment options, and other features to see which financial product offers the best value for money.
- Know the eligibility criteria: Read all the fine print associated with the finance product to ensure that you satisfy all the relevant eligibility criteria. That said, it’s worth keeping in mind that, due to the varied nature of agribusinesses, applications for agribusiness finance are usually assessed on a case-by-case basis.
- Put together a comprehensive application: Make sure any application you submit addresses all the criteria that the financial institution has attached to the financial product. Carefully describe the management team, business model, and the underlying assumptions used in your financial projections. Take time to go through all the documents that the lenders are asking for, as your chances of success increase if all the required documents are accurate and submitted in the right format.
- Ask for expert advice if needed: Ask your accountant or an experienced financial analyst for advice. It is always beneficial to have the and accountant or auditor validating the financial information before submitting to the financial institution.
- What final recommendations can you give to agribusinesses that are looking for financing?
- To have perseverance – time and effort are key for finding the right financing and investment opportunity. You have to put a great amount of effort into finding and attracting investors, and do your best to always shine as best as you can.
- Build relationships – it is important to invest time in meeting people. There are multiple events dedicated to agricultural finance where you will have the opportunity to meet investors and lenders directly, but afterward, you’ll need to invest in following-up with them. Investors often take an interest in people they like. So if you invest in relationships, starting with a friendly conversation, they might want to learn about your business and might recommend you to other people who are willing to invest.
- Don’t be scared of failure – you will fail many times before you succeed. However, don’t let failure hold you back. It takes time to put business plans together for investors, and you are lucky if you get a response at all. Although being turned down repeatedly can get really frustrating. It is important to learn from the times when you don’t succeed, and to ask for feedback on ways to improve your applications.
- Ask for advice – always ask people in the finance sector for advice. They might say, “Sure, let’s have a call, or let’s talk”. This has always helped us to improve as a company, and to find the next opportunity. It is important to accept that these people are the experts when it comes to financing, and their advice can help you improve your business. Having the opinion and advice from an investor is the best input you can have.