Establishing a farming enterprise can be nerve wracking, especially when it comes to financing. Nico Groenewald of Standard Bank understands both the difficulties and rewards when it comes to securing financial support that will help you to sow those first seeds. Nico recently spoke to Plaas TV about the challenges of starting out and getting a new farming business off the ground.
According to Nico, the starting point of any new farming venture has to be a self-reflective one. “You should ask yourself why you want to be a farmer. Are you financially motivated? Are you passionate about the industry itself? You have to know why you are set on establishing your own farming enterprise.
“Asking these questions shouldn’t demotivate you or make you question your motives. By knowing exactly what will motor your tractor’s engine, you are actually moving closer to establishing your business’s vision and mission statements,” he adds. “By examining your true intentions you will also indirectly start to plan and figure out what resources you will need to reach your goals.”
Factors that impact on business success
There are three important factors that one has to take into consideration when starting a new business, according to Nico. “Firstly, you have to examine the external environment that your business will be established in. This analysis is also known as a PESTEL analysis, which is an acronym for a tool used to identify the macro (external) forces facing an organisation.
“The letters in this acronym stand for political, economic, social, technological, environmental and legal forces. These forces can, to a great extent, influence the success of any new business venture and will need to be thoroughly examined before a business plan is drawn up,” he explains.
“Secondly, you have to perform an industry analysis, which is another term for a market assessment tool that will help you to examine price trends, specific overviews, past trends, and the demand-supply mechanics of a specific industry. This analysis will also help to establish your target market.
“Thirdly, you will have to establish the capital, labour and technological requirements needed to both kickstart and maintain your business. All of these requirements and business analyses will have to be laid bare in your business plan for any prospective financier to study, if you are serious about securing financial aid,” adds Nico.
Financing your farming enterprise
According to Nico, securing financing is one of the bigger challenges that any prospective farmer faces, seeing as most sectors in the farming industry are capital intensive. “The first step is to establish whether you will be needing a short-, medium- or long-term loan. The best, but often impractical solution, is to invest your own capital. However, this isn’t a feasible solution for all prospective farmers,” he explains.
It may be more beneficial to first consider some alternative options before applying for a loan. “Is there someone that would be willing to enter into business with you and perhaps share in the costs? Maybe you have a family member that would be willing to sponsor some of the upfront costs? Alternatively, you could approached so-called angel investors (also known as informal investors) who’d be willing to put their money on the line when it comes to investing in a business that has a solid financial plan in place.
“If you don’t have access to alternative means when it comes to funding your new enterprise, then you can sell some of the ownership of your company via shares. You can also secure a loan from an establishment that specialises in project financing or you can apply for a loan at a bank.
Banks generally look at the character of the borrower, his capacity to repay, capital available from the client, collateral available, and conditions pertaining to the transaction and the environment.
“Lastly you can look to trade creditors, who normally finance short-term loans, for financial aid. However, be careful not to finance a long-term need with a short-term loan,” Nico concludes. – Claudi Nortjé, Plaas Media, on behalf of Standard Bank