Affordability & Financing Models for the Smallholder Market

Traditional commercial lenders often do not want to lend to smallholder farmers due to factors such as low financial literacy, limited collateral, low perceived earning potential, and the perceived high degree of uncertainty and risk associated with agriculture. Lenders also do not understand the smallholder market well and most lack the infrastructure needed to effectively service this market. Given this financing gap and the fact that most farmer income is used to meet basic needs, businesses serving smallholder farmers must rely on innovative methods to enable customers to purchase products and services. Without doing so, companies risk having a limited market for their products and services. There are a number of promising affordability and financing strategies available for companies to offer customers outside of traditional commercial lending. Data shows that smallholder farmers want financing options. Research conducted by the Monitor Group in 2010 found that 91 percent of farmer respondents said that "input access and funding" was their top concern and 55 percent said that "credit for input purchases" was their top desire. The decision to pursue product affordability and financing depends on a number of factors, including an understanding of the customer, the product or service being offered, the company offering it, the market context, and the details of the strategies themselves. Affordability and financing are distinct concepts. Affordability refers to decreasing the cost of a product or service, whereas financing refers to providing assistance with purchasing the good or service by offering a choice of how to pay for it, usually reducing upfront costs. Companies must evaluate which affordability or financing choice is optimal based on information about the customer and the context. This evaluation will help determine when to use affordability and financing strategies to facilitate product adoption. The strategies available for companies to offer customers outside of traditional commercial lending include risk sharing through partnerships, bundling and cross-subsidization, no frills, pay-per-use, consumer financing, asset financing, and leasing. These strategies can be used to increase customer adoption and provide a comprehensive solution that meets the needs of smallholder farmers. By understanding the variety and viability of these strategies, companies can decide which approach is best and most achievable for their business models.