Agricultural Small and Medium Enterprises (SMEs) play a monumental role in our country’s economy. Linking farmers to markets, job creation, and building farmers’ resilience to climate shocks—these SMEs have the potential to drive innovation and efficiency that can improve farmers' livelihoods and develop our food system. However, to fully live up to this potential, SMEs need access to the right resources and support to help them grow and shore up their services.
Agricultural entrepreneurs often face significant hurdles in securing funding from traditional financial institutions. The unpredictable nature of agriculture and commodity markets makes agripreneurs and businesses appear high-risk, causing financial institutions and venture firms to be reluctant to extend financial support to agri-SMEs.
Existing data shows that 75% of the 130,000 agri-SMEs in Africa cannot access formal bank financing, creating a $75 billion financing gap in this sub-sector.
The scarcity of financial resources restricts the ability of agricultural SMEs to invest in necessary innovations that could enhance their scale of operations and productivity. With sufficient capital, these enterprises can modernise, automate, or expand their operations to reach more farmers and meet higher standards of efficiency, quality, and output.
Additionally, as these entrepreneurs develop their businesses to attract investment, they require financial system management and governance skills alongside the business acumen to think strategically to grow from a start-up to a fully functional business. This will allow them to capitalise on opportunities to expand their customer base, including potential export markets. Staying competitive requires improvement and adaptation to meet industry standards, and with the right support, these entrepreneurs can learn from business experts.
How venture firms support SMEs
The good news is that even with these challenges, venture capital firms and impact investors are increasingly seeing opportunities to invest in innovative solutions in the agricultural space. According to the African Private Equity and Venture Association (AVCA), there has been a noticeable increase in venture capital going into Africa’s agriculture-related businesses over recent years. In 2023, sustainable agriculture and forestry were the leading categories that attracted impact investment. Here in Rwanda, the Smallholder Resilience Ventures (SRV), an affiliate of One Acre Fund, has helped funnel funding and resources to promising agri-SMEs throughout the country.
Providing SMEs with capital support to grow and expand their operations, has a ripple effect on smallholder farmers. An example is the SRV's support to a local private coffee processor that sources coffee from smallholder farmers, then processes and exports premium coffee. The SRV provided working capital that helped increase operations. In turn, in 2023, the company purchased over 500 metric tonnes of premium coffee from 2,000+ farmers, half of whom were women.
With this growth in scale, businesses often have to increase their workforce, contributing to community job opportunities and income generation for farmers who sell their produce at a profit to the agri-enterprises.
As well as investments, SMEs are also benefiting from knowledge on financial systems management and governance skills. The SRV provided technical assistance to local companies, offering business advice to help them understand the dynamics of building a new company. This expertise helps entrepreneurs run their businesses effectively and prepares investees for future capital raises.
Despite the vital role that agricultural SMEs play in food systems, they sometimes struggle to access finance tailored to their specific needs. In my experience, microfinance institutions often provide financing below the capital needs of SMEs, while commercial lenders often find it too costly and risky to lend to these enterprises. This means there is a unique opportunity for agricultural investors—like One Acre Fund’s SRV—to support the often invisible middle of this equation.
In today’s diverse financial landscape, the right investment can enable agri-SMEs to keep transforming food systems, and pivot their own business models to keep innovating and generating economic opportunities in rural and urban areas. By connecting and working collectively, various players, including the government, agricultural organisations and development partners can create an effective, inclusive ecosystem to increase the flow of capital for agricultural SMEs.
Susan Asiimwe is the Director of Government Relations and Legal at One Acre Fund Rwanda.