Leasing: Two Models

Innovare’s research shows that a major bottleneck for agricultural production is not with the smallholder farmer, but rather, with the agricultural value chain infrastructure and lack of equipment. Simply put, investment is required all along the value chain to allow for increased agricultural production and for farm produce to be processed and packaged to flow out from the farm.

While larger African agribusinesses can generally obtain “affordable” bank financing to purchase property, plant and equipment, and micro-enterprise African businesses are able to achieve some financing through various micro-financing for some of their purchases, SMEs face borrowing rates that are high, with high collateral and guarantee obligations, and inadequate credit standing with local lenders. Without investment, agricultural produce does not flow easily along the value chain.

Innovare has created a Lease Financing Facility to address this market gap, for SMEs to purchase long-lived equipment to build their production capacity, our “Vendor Based Model”. Second, Innovare has expanded the use of the Lease Financing tool to farmer organizations and even small holders by partnering with organizations which are expert at connecting with farmers to provide mechanization and training, our “User Based Model”.

Vendor Based Model:

In many cases, the SMEs are the companies which buy agricultural produce from small holders, increasing demand for locally harvested grains. Further, whether established businesses or start-ups, they require processing equipment to convert the grains, soy or other farm produce into food, fiber or feed. Often they have identified a manufacturer from which they wish to buy the agriculture processing equipment required to operate their business, but then they are thwarted in making the purchase for lack of financing.

Innovare Advisors has incorporated this knowledge of the financial challenges to the agriculture value chain and combined financial leasing and risk mitigation techniques to enable SMEs to access capital and Vendors to increase their sales of the vital equipment to the SMEs. The Innovare Lease Facility builds on the strength of African-based leasing partners, uses a vendor “buy-back” guarantee that allows the asset being purchased to serve as collateral for a significant percentage of the lease exposure, and builds in other guarantees so capital can be made available to qualified SMEs for their purchase of productive assets.

Innovare partners with vendors who pre-qualify their SME customers as good candidates for lease financing, and with locally based lessors who can administer the leases “on the ground”. The SMEs may be able to obtain a financial lease as the asset itself will be productive, allowing the company to generate the revenue which allows it to make the lease payments over time.   The outcome is that the SME has an additional method – beyond costly bank borrowing, or the need to amass cash – for the purchase of equipment which it can use to build its business. Once the lessee completes its payment obligations to the lessor, the title of the asset transfers to the lessee and the lessee becomes the owner of the asset.

This Facility assists SME food and feed processors to expand their businesses by offering lease acquisition financing of agro-processing equipment. With increased processing capacity, the SMEs are more able to buy grains and other farm products from the small holders who have been seeking markets for their produce. In sum, a bottleneck in the value chain is eliminated.

User Based Model:

Innovare is a founder and the lead manager of L3 Group (Leasing Leveraging Livelihoods), an integrated business partnership with Post-Harvest Technologies and Centum Learning,  which has created a partnership with the Alliance for an African Green Revolution (AGRA)with a mutual commitment to increase production and to improve the livelihoods of smallholder farmers and their communities.  This will be accomplished through appropriate mechanization for the agricultural value chain, supported by lease financing, and the provision of the training and technical assistance necessary to help smallholder farmers, farmer organizations and SMEs  effectively use and maintain the equipment.   The AGRA L3 Partnership will  add lease financed equipment and technologies with AGRA’s established transformative agricultural development initiatives across.

Lease Financing Facility Beneficiaries

As the Facility provides additional, alternative financing to businesses which often have difficulty accessing capital, it addresses a development need which can help: 

• Agro-businesses:  financial leasing can provide a resource which allows them to build their operations, 
• Smallholder Farmers:  increased local processing capacity creates a “pull-through” market for their crops,
• Consumers:  increased food and feed produced locally contribute to improved value, including the potential for better nutrition, in regional markets and 
• Equipment Manufacturers:  customer base with capital access leads to expanded sales and access to SME markets.  

Value Creation
The leasing facility creates value by providing catalytic capital to SMEs which:

• Allows them to purchase equipment to improve food & feed production,
• Enables them to buy inputs from small holder farmers, increasing farm income,
• Can help managers create jobs with the expansion of their production lines using added equipment, and
• Can contribute to alleviating bottle-necks in the agricultural value chain.