De-risking Agri-SMEs

Agri-SMEs across Sub-Saharan Africa seeking between USD 50,000 and USD 2 million in growth capital fall into the “missing middle” too large for microfinance and viewed as too high-risk or small for commercial banks. As a result, these enterprises remain underserved, contributing to an estimated USD 74.5 billion annual financing gap. This is despite their critical role in rural employment, income stability, and agricultural transformation.

Traditional funding instruments such as debt, equity, and grants remain essential. However, they often fail to accommodate the sector’s seasonal incomes, price volatility, and production risks. To address this challenge, several alternative financing structures have emerged that align better with agriculture’s cyclical nature while reducing risk for investors.

Revenue-Based Financing (RBF)

Revenue-Based Financing provides flexible repayment tied to a pre-agreed percentage of monthly revenue rather than fixed loan instalments. This model is particularly suited to agriculture, where income fluctuates with seasons.

In Ethiopia, the Cooperative Bank of Oromia, supported by Renew Capital, piloted RBF loans for agribusinesses in 2024. Entrepreneurs repay 20% of monthly revenues, providing breathing room during low seasons. This flexibility reduces the likelihood of cash-flow strain and loan default while requiring minimal collateral.

Anchor buyer-backed lending

Uganda produces an estimated 2.2 million litres of milk per year, but only one-third of this enters formal processing channels. Most smallholder farmers sell informally and lack collateral to access credit.

Anchor buyer-backed lending addresses this challenge by linking loan repayment to a guaranteed buyer through an offtake agreement, rather than relying on land titles. For example, a large dairy processor in Uganda partnered with a social enterprise to launch a USD 120 million financing initiative. Farmers receive inputs and equipment on credit, and repayments including interest are automatically deducted when milk is delivered to the processor. This arrangement lowers lender risk and improves financing access for farmers.

Factoring

Factoring allows agri-SMEs to sell their invoices to a third party at a discount, in exchange for immediate cash flow. This helps bridge working capital gaps, particularly when buyers have delayed payment terms.

For instance, a rice miller in Kenya who supplies 10,000 bags of rice at KES 1,500 per bag may wait 60 days to be paid. By selling the KES 15 million invoice at a 15% discount, the miller receives KES 14.25 million immediately to manage operational expenses.

Despite its potential, factoring remains underutilized in Africa accounting for less than 1% of global factoring volumes. In Kenya, adoption is below 2%. Fintech firms like IMFact are expanding access, supported by organizations such as FSD Africa, which invested £3 million in 2021 to scale factoring solutions.

Warehouse Receipt Financing

Warehouse Receipt Financing enables farmers and agribusinesses to store produce in licensed warehouses and use the receipt as collateral to secure loans.

This system has helped reduce post-harvest losses from about 40% to as low as 10% in some regions. For example, a wheat processor depositing 50 tonnes of unprocessed wheat valued at USD 350,000 in a certified warehouse can use the receipt to secure approximately USD 250,000 in working capital. The produce remains locked as collateral until the loan is repaid.

In Kenya, certified warehouses under the Warehouse Receipt System (WRS) allow farmers to access credit without selling produce prematurely at low prices.

Conclusion

Agri-SMEs are central to Africa’s food systems, yet they remain significantly underfinanced. To unlock their full potential, financing mechanisms must reflect the realities of agricultural production seasonality, price risks, and limited collateral.

At Agri-Frontier, we remain committed to bridging this gap as transaction advisors by structuring fit-for-purpose capital solutions that balance risk for investors and enable sustainable growth for SMEs.

These alternative instruments provide de-risked, impact-oriented opportunities for investors and empower SMEs with the capital required to scale, innovate, and build long-term resilience.

By David Litali