Although it’s optimistic to think of fintech for everyone and a universal rate of financial inclusion, the reality of the situation is much patchier than could be first imagined.
Here to identify the holes that are present in even the most contemporary funding systems is Nikita Goncars, who is the CEO of LendSecured – a crowdfunding platform that helps European farmers secure financing, using grain as collateral.
He has over 10 years of experience in lending and business development. Combining his and his co-founder’s experience in finance with digital innovations, LendSecured is built to solve a global problem; a global problem that Nikita addresses in this guest post for The Fintech Times.
Traditional lending has an ironic blindspot – the agricultural sector. Faced with risk-averse lending institutions, small and medium-sized farms are often left without the funding needed to grow. That is, until now.
When Silvija Driksna, a small family farm owner from Latvia, saw the chance to expand her countryside business and buy additional livestock for the herd, she initially turned to her local bank. There, however, she was met with bureaucracy and prohibitive processes – the bank required in-depth accounting documents, had long document processing times, and gave no guarantee that after all the hassle, their decision would eventually result in a loan.
Because cattle-farming is season-specific and thus purchasing new livestock would be time-sensitive, she couldn’t afford the risk of missing the seasonal purchasing window. A loan from a bank was not an option.
Fortunately, thanks to advances in fintech, small farmers are able to look for funding elsewhere. In Silvija’s case, she found the support she needed in crowdfunding.
The problem – big bank business models don’t support small farm realities
Uncertainty and rejections – that’s the reality many small-scale farmers from rural Europe face when applying for loans to expand their businesses. The bureaucracy that costs time (and money), as well as the general tendency of banks to be risk-averse and therefore prefer investments in large farms and corporations, put small and medium-sized farmers at a disadvantage.
According to a report that reviews the financial needs of EU agricultural enterprises and was developed in collaboration with the European Investment Bank, 12.3% of farmers find it difficult to access bank loans for investments, and 10.4% have had difficulties in accessing finance for working capital. In the meantime, big farms not only have better access to bank loans, but they also benefit most from the EU’s subsidy system – about 80% of the subsidies go to just 20% of farmers.
While the large-scale factory-type farms seem to have it all, small farms are struggling to receive the necessary financing and are pushed out of business. According to an analysis by Guardian, the number of farms in the EU fell from 14.5m to 10.3m between 2005 and 2016, the latest year for which comprehensive data is available. This results in higher rates of rural poverty, less biodiversity, and less sustainable farming practices as the large farms take over.
What’s more – by allowing the small farms to ”go extinct”, we may soon face a food crisis, especially in rural areas. The World Bank estimates suggest that demand for food will increase by 70% by 2050 and at least $80 billion annual investments in the agricultural sector will be needed to meet this demand. Access to financing will be especially crucial for poor farmers and small farming households, as this will directly impact their wealth and ability to produce food to 9 billion people by 2050.
The solution – crowdfunding rural farmers in Europe
Realising that the chances of securing financing from the bank are small but refusing to give up, Silvija started to look for other options. That’s when she applied for a loan through LendSecured – a crowdfunding platform that allows farmers to borrow the necessary capital at the start of every season, then repay it back at the end of the season by sharing the profit from selling their harvest.
The funding platform is focused on bringing more opportunities for growth in emerging Europe, particularly to countries like Hungary, Latvia, Estonia, Lithuania, Greece, Romania, Bulgaria, Croatia, and Spain.
”LendSecured took an interest in our situation and we felt understood. In the end, we received a loan from EU citizens who also understood our situation and struggles,” said Silvija who is now investing the received funding into the development of her 30ha farm.
Addressing the agricultural funding blindspot
The struggles of farmers that banks and many other financial institutions don’t seem to fully understand is how much upfront investment agriculture businesses require at the beginning of every season – to purchase and fix machinery, buy fertilizer, seeds, fund pre-harvest hiring, and so much more. Without this up-front investment, farms can’t drive growth, which keeps them in a vicious cycle of stagnation.
Until the business reaches the break-even point, its highest value lies in assets such as livestock or their future harvest – something that traditional banks don’t accept as collateral. But in reality, such assets are very valuable. For example, grains are highly liquid and have transparent market prices all over the EU, which makes it easier to evaluate than, for example, agricultural land.
By accepting future harvest as collateral, LendSecured solves the 19 billion funding gap in the agricultural sector and gives farmers a chance to scale their businesses – an opportunity that banks don’t otherwise offer. Since the platform’s launch in January 2021, it has already helped 47 small and medium-sized farms attract loans for a total amount of nearly €620k. By 2022, LendSecured aims to have issued 20M in loans to farmers across the EU.