Segmenting the ag finance market, Part 4: small and medium-sized enterprises and transaction sizes

Photo: Feed the Future / Likati Thomas

In parts 1-3, we talked about smallholder farmers. Now we’ll shift our discussion to small businesses, or as referred to in the development sector, small and medium-sized enterprises (SMEs). Some highlights:

  • A finance activity’s connection to smallholders can be long (indirect) or short (direct).

  • Transaction size is a good proxy for defining SMEs.

  • You need to understand unit economics to understand if something can scale.

When is a finance activity a smallholder finance activity and when is it an SME activity? One Acre Fund is clearly a smallholder activity. It is an organization that works directly with smallholder farmers. Aceli Africa, a market-based incentive facility that USAID supports, is clearly an SME activity. It provides incentives to funds and banks that lend to SMEs that meet minimum "positive impact criteria," e.g., sources from at least 25 smallholder farmers. How about the case of the Farmfit Fund, a blended finance activity that USAID also supports? On its website, it describes itself as “the world’s biggest ever public-private impact fund for smallholder farmers.” It is true that its goal is to help smallholder farmers, but it does not make loans directly to smallholder farmers. The businesses that it does make loans to are much larger than the ones that Aceli targets. The point is that you sometimes need to dig a little beneath the surface to understand exactly what an activity does.

Some SME definitions

How should we define an SME? One of the most common definitions used from the International Finance Corporation (IFC) is based on number of employees, total assets and/or revenue. A company must meet two of the three criteria below:

While this makes sense in principle, in practice it's challenging to collect this type of information. The employee definition doesn't apply well to cooperatives or other agri-SMEs that might have fewer than 50 employees but purchase from several hundred or several thousand farmers. That is why the IFC uses transaction size as a proxy:

This is definitely my preference and the approach Aceli Africa uses to define SMEs, i.e. those with borrowing needs from $25,000 to $1.5 million. ISF Advisors similarly uses a range of $50,000 to $2 million.

Debt or equity?

One other thing I'll note is that the IFC transaction size specifically references loans. I think this is important because in my mind it acknowledges that most SMEs in developing markets are looking for debt rather than equity. Most people are familiar with the stock market but not the debt market. I think this makes them not realize how important debt, i.e. credit markets, are. In 2020, companies globally raised $27.3 trillion in debt (long-term bond issuance) and $826.8 billion in equity, meaning that only 3% of the total capital they raised was equity.