Bridging Working Capital Gap in Nigeria for Agrifood Ventures

Overview of Agribusiness Financing Landscape in Nigeria

Nigeria’s agricultural sector contributes 23.31% to GDP and employs millions, yet the industry’s growth trajectory is repeatedly disrupted by systemic financing bottlenecks. Most discourse and intervention programmes focus on production-stage financing: supporting farmers with inputs, credit for early-stage agribusinesses, or funding export-driven value chains. However, the “in-between” stage like processors, aggregators, and distributors remains chronically underfunded. These midstream actors are essential for converting raw produce into market-ready products, extending shelf life, and ensuring nationwide distribution.

For small and medium-scale processors, the challenge is not solely the cost of setting up processing facilities. The more pressing, less addressed, issue is the constant demand for operational working capital to purchase inputs, maintain inventories, run production cycles, and manage logistics. This need is amplified by extended payment terms from buyers, rising energy costs, and seasonal price volatility. Without affordable, flexible financing targeted at this segment, Nigeria risks slowing the very link in the food value chain that ensures production translates into accessible, affordable food for consumers.

The Current Financing Gap

Agrifood processors operate in a structural financing blind spot. Development finance institutions and some commercial banks have mechanisms for asset acquisition like machinery loans, equipment leasing, and facility construction credit. While important, these capital injections are typically one-off and tied to fixed assets. The operational reality is that processors require significantly larger, recurring injections of working capital to maintain production flows.

Several factors such as the following exacerbate this gap:

1. Cash-to-crop cycle length: Payment terms in the sector often stretch 45–90 days after delivery, locking up capital in receivables while production cycles demand immediate cash outflows.
2. Input price volatility: Seasonal fluctuations in commodity prices and rising diesel costs create unpredictable cash requirements.
3. High cost of bank loans: Lending rates in double digits erode already thin margins, making borrowing uneconomical.
4. Exclusion from capital markets: Instruments such as commercial papers remain inaccessible to SMEs due to scale, credit ratings, and investor preferences for large corporates.
5. Debt rollover trap: Businesses often resort to short-term borrowing to cover maturing obligations, perpetuating a cycle of dependency without building real capacity.

This mismatch between capital availability and operational needs is not just an inconvenience, it is a strategic risk to national food security. A processing plant without affordable working capital is equivalent to idle land during planting season: the infrastructure exists, but output collapses.

Why Traditional Financing Fails

Traditional financing mechanisms such as commercial bank loans, overdrafts, and asset-backed credit are ill-suited for the operational realities of small and medium-scale agrifood processors. The following are factors driving this misalignment;

1. High interest rate environment: With monetary policy rates currently at 27.5% and commercial lending rates between 32 - 36% annually, borrowing costs are expensive. For processors operating on margins between 5–12%, these rates are unsustainable and discourage formal borrowing.
2. Collateral bias: Most bank loans are collateralised against fixed assets such as real estate, which many SMEs in the processing space do not possess at bank-acceptable valuations.
3. Short tenures and rigid repayment schedules: Traditional loans are structured with fixed repayment cycles that do not reflect the irregular, seasonal, and sometimes unpredictable nature of agrifood cash flows.
4. Perceived high risk of SMEs: Financial institutions often classify agrifood SMEs as high default risks due to limited credit histories, informal operational practices, and exposure to commodity price fluctuations.
5. Misaligned risk-return profile for private investors: Venture capitalists and private equity funds typically prioritise high-growth, scalable technology or export-focused businesses. The relatively modest growth trajectories and low scalability of many domestic-focused processors make them unattractive to these investors.
6. Inadequate public sector working capital programmes: While there have been government-backed schemes for agriculture, most target input financing for farmers or large-scale agribusinesses, leaving processors underserved.

The result is a persistent financing vacuum: processors are too small for capital markets, too risky for commercial banks, and not high growth enough for venture capital. Without dedicated working capital products tailored to their cash cycle, the financing problem becomes structural rather than cyclical.

The Risk of Doing Nothing

The absence of affordable and accessible working capital financing for agrifood processors has macroeconomic and social implications that extend beyond individual business survival. If the current financing gap persists, the sector will continue to experience:

1. Increased business mortality: Many small and medium processors operate with limited liquidity buffers, making them highly vulnerable to cash flow shocks. An extended delay in payments or an unexpected spike in input costs can trigger insolvency.
2. Underutilisation of installed capacity: Even where processing facilities exist, lack of operational capital means plants operate well below capacity, reducing output, efficiency, and return on capital investment.
3. Rising food prices: Supply constraints from struggling processors contribute to higher market prices, especially for staple and processed foods, exacerbating food inflation.
4. Job losses: Processing plants are labour-intensive, employing both skilled and unskilled workers. Business closures or reduced output result in direct job losses and reduced income in rural and peri-urban communities.
5. Value chain instability: Processors are critical off-takers for farmers. If processors reduce or suspend operations, farmers lose reliable buyers, leading to post-harvest losses and income volatility.
6. Reduced competitiveness of Nigerian agrifood products: Inconsistent supply, poor economies of scale, and high unit costs reduce the ability of Nigerian processors to compete with imports, both locally and in regional markets.

The costs of inaction compound over time, creating a feedback loop where financial exclusion at the midstream stage undermines farm-level productivity, food affordability, and rural economic stability. Addressing this financing gap is therefore not optional; it is a strategic necessity.fore choosing a financing source, several key questions must be answered:

Policy Imperatives for Bank of Agriculture

The Bank of Agriculture (BoA) is uniquely positioned to address the working capital financing gap for small and medium-scale agrifood processors. Unlike commercial banks, BoA’s mandate combines financial sustainability with developmental impact, allowing it to design products that prioritise sectoral resilience over short-term profit maximisation. With the recapitalization of BoA to ₦1.5 trillion in Q1 2025, the bank is more positioned to improve access to agricultural credit, support agricultural value chain, address sectorial infrastructure deficits and help scale innovations in food production.  A targeted intervention programme should be built on the following pillars:

1. Performance-based Lending
   • Move beyond collateral-heavy requirements by linking loan limits and pricing to demonstrated operational performance, supply reliability, and payment history.
   • Integrate digital transaction monitoring to track sales and receivables, providing lenders with real-time risk assessments.
2. Supply Chain-embedded Finance
   • Partner with large buyers (retail chains, FMCGs, exporters) to provide pre-approved working capital to vetted suppliers, secured against confirmed purchase orders.
   • BoA’s role would be to underwrite and disburse funds while the buyer provides repayment assurance.
3. Aggregator Credit Model
   • Finance trusted aggregators who can distribute working capital to clusters of smaller processors, reducing transaction costs and improving oversight.
4. Pay-later Logistics Support
   • Offer transport and cold-chain financing as a service, allowing processors to defer payment until goods are sold and payments are received.

Implementation would require BoA to blend concessional funding with targeted technical assistance. Partnerships with other development partners, impact investors, and state governments could expand the pool of affordable capital while sharing risk.

Funding Mechanisms and Safeguards

A major barrier to affordable working capital financing is Nigeria’s prevailing high-interest-rate environment. For the Bank of Agriculture (BoA) to offer concessionary rates without compromising its own sustainability, the financing structure must blend multiple funding sources and integrate strong risk-mitigation measures. Key approaches include:

1. Blended Finance Structures
   • Combine concessional funding from government allocations, donor agencies, and other development finance institutions (DFIs) with BoA’s resources.
   • Concessional capital can absorb part of the risk or subsidise interest rates, enabling BoA to lend below prevailing market rates.
2. Credit Guarantees and Risk-sharing Facilities
   • Partner with institutions such as the Nigerian Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL) to cover a percentage of loan defaults.
   • This allows BoA to extend credit to smaller processors without requiring prohibitive collateral.
3. Invoice Discounting Platforms
   • Integrate digital invoice financing systems to allow processors to access a percentage of confirmed receivables as immediate cash, with repayment tied to buyer settlement.
   • This limits risk exposure to the creditworthiness of known buyers rather than the processor alone.
4. Revolving Credit Pools
   • Structure working capital products as revolving facilities rather than one-off loans. Borrowers who repay on time automatically regain access, creating capital recycling and reducing administrative costs.
5. Partnership with State Governments and Newly Proposed Commodity Boards
   • State governments and newly proposed commodity boards can contribute to guarantee pools or interest buy-down programmes for processors operating within their jurisdiction.
6. Stringent Monitoring and Digital Oversight
   • Require processors to maintain digital transaction records, enabling real-time monitoring of cash flows and inventory turnover.
   • Integrate early warning systems for default risks, such as sudden drops in sales volume or production.

By combining concessional capital, shared risk, and technology-enabled monitoring, BoA can sustain a dedicated working capital programme that is both affordable for SMEs and financially viable for the bank.

Advice to Agribusiness Owners

While structural reforms and targeted intervention programmes are necessary, agribusiness owners also have a role to play in positioning themselves to overcome financing bottlenecks. Many small and medium-scale processors in Nigeria lack the financial systems, governance structures, and readiness required to access formal credit, commercial paper markets, or development finance. Strengthening these fundamentals can significantly improve their bankability and sustainability.

Key steps include:

• Financial system upgrade: Maintain accurate and auditable financial statements, backed by robust accounting processes.
• Funding mechanism readiness: Understand the technical requirements for each funding avenue (e.g., development bank facilities, commercial paper issuance, blended finance) and align business documentation accordingly.
• Capacity development: Build internal expertise in cash flow management, cost optimisation, and inventory planning to reduce reliance on expensive short-term debt.
• Partnerships with expert advisors: Work with specialised consultancy firms like Vestance that can bridge the knowledge and credibility gap between agribusinesses and financiers.

Working with Expert-led Advisory Service

Vestance helps agribusiness owners unlock the full potential of agriculture through tailored financial advisory services. Our offerings cover:

• Capacity development for management teams and finance units.
• Financial modelling and valuation to support investor engagement.
• Fundraising support, including business plan development, feasibility studies, data room preparation, etc.
• Due diligence preparation to meet lender and investor requirements.
• Funder support and transaction advisory for sustained growth.
• Business model design

Vestance also assists in designing business models that meet the eligibility requirements of targeted funding mechanisms, helping enterprises strengthen their financial systems to access such facilities and even prepare for commercial paper issuance. Partnering with expert advisors is not a luxury, it is a critical step for any agribusiness aiming for long-term stability in Nigeria’s challenging financing environment.

Conclusion

Nigeria’s agrifood sector cannot achieve its full potential without targeted support for midstream actors, particularly small and medium-scale processors. While farm-level financing and large-scale agribusiness funding have received policy attention, the working capital needs of processors remain chronically underserved. This financing gap is structural, stemming from high interest rates, rigid collateral demands, and risk perceptions that exclude SMEs from conventional credit channels.

The Bank of Agriculture, by virtue of its developmental mandate, is strategically positioned to bridge this gap. A dedicated, well-structured working capital programme supported by blended finance, risk-sharing mechanisms, and technology-enabled oversight can address liquidity constraints without undermining the bank’s financial stability. Such an intervention would:

• Reduce underutilisation of installed processing capacity
• Stabilise value chains by ensuring reliable off-take for farmers
• Moderate food price inflation through consistent supply
• Protect and create jobs in rural and peri-urban communities
• Enhance Nigeria’s competitiveness in domestic and regional food markets

Immediate action is required to prevent further attrition of processing capacity and to build resilience in the country’s food system. Addressing the working capital challenge is not simply a financial decision, it is a strategic economic investment with direct impact on food security, rural livelihoods, and industrial development.