Unexpectedly, Root Capital and Kiva have joined forces to create an unprecedented referral system that will cross-pollinate their sustainable agriculture-finance programs. Root Capital is routing approved applications in the $10,000-$50,000 range to Kiva for zero-percent-interest financing. Once these businesses grow, they can apply for larger amounts of financing at competitive interest rates from Root Capital.
These leads are being generated by Root Capital’s offices in South America and Africa.
Root Capital’s environmental due diligence for loans in its own portfolio includes assessments of environmental management systems, land use, ecosystem and biodiversity conservation, agrochemical use, soil conservation, water use and conservation, energy use, and waste management. It is applying a lighter-touch assessment of these criteria to the referral program with full due diligence on enterprises that return for commercial funding. This increases Kiva’s motivation to collaborate.
The first referred and funded enterprise, Cacao de Aroma, is a cooperative that is transforming local economic opportunities for agricultural communities in Peru. Kiva is seeking to expand this program and create other partnerships.
Elicia Carmichael, senior director of business development and marketing at Root Capital, and Carlos Pierre, senior manager of strategic initiatives at Kiva, were interviewed jointly. They shared their hopes for the gradual growth of this collaboration. There appears to be massive need for financing for enterprises in this segment.
CFN: I’m interested in hearing the story of Cacao de Aroma, the first project you are funding, which Root Capital posted about on Facebook.
Carmichael: Cacao de Aroma is located in VRAEM (Valle de los Ríos Apurímac, Ene y Mantaro), which is the world’s largest cocaine-producing region. Situated in a region with high poverty rates and a history of violence, Cacao de Aroma gives farmers a profitable agricultural option other than the coca leaf: fine aroma cocoa for high-end European markets.
Locally, it provides a fantastic example for producers seeking sustainable livelihoods that don’t involve coca production. The members of this fair-trade co-op take great pride in the fine quality of cocoa they’re growing.
Pierre: When Cacao de Aroma applied… they themselves did not brag about their incredible impact. These are co-ops that are run by farmers who are just telling you how it is and don’t really sweeten it.
Carmichael: This cooperation is aligned with our mission. When we help businesses grow, then they generate impact in their communities. They become this hub of security and stability in the rural economy.
Debt capital is one tool. But we want to also see them grow their human and social capital. We have provided financial management training. Our goal is to help them meet the challenges they face by empowering them to meet their own potential.
Behind the scenes, we’re helping them figure out their financial analysis capabilities and put best practices into place.
CFN: Could you talk about the problem that you’re solving and how your solutions fit together?
Carmichael: Root Capital has offices across Africa and Latin America and professionals on the ground who are assessing businesses for our own credit offering. And in the past, year after year, businesses have come to us that have been too small, and we’ve had to turn them away.
Until now, there was never anywhere for them to turn to.
We understand a lot about their context and our agricultural lending experience helps us assess whether they would be good referrals.
They go through an interview with our staff. We hand them off in a very personal way to Kiva.
In this case, with the first group, Cacao de Aroma, we were able to offer our advisory services to the client. We had our advisory team on the ground working with them to help them improve their financial management practices and policies. That made us feel more confident about referring them.
At Root Capital, we’re committed to helping these under-resourced agricultural businesses get what they need to grow. We do that in a few ways. One is the access to capital or financing. Another is having them develop business skills and better financial practices.
There’s a certain range of businesses that qualify for the services that we provide. But there’s an even larger number of businesses that don’t get qualified – that are too small, too new, or too unproven to enter into our portfolio.
Our portfolio is already incredibly pioneering and high-impact, but also it has its risks, because we’re working in agriculture and we’re working where commercial banks won’t go.
So there’s still this gap in our ability to lend to groups that are just below our threshold. These groups may need $10,000 to $50,000 - or even a bit more.
There are numerous other social lenders that will lend amounts over $500,000. We find that we’re really alone in many cases when we’re trying to lend under $250,000. Lending under $100,000 is almost unheard of in our space. And that under-$100,000 market is harder for us to address. It’s less cost-effective in terms of underwriting and we can’t price in those expenses or the heightened risk of a younger business. We are not well positioned to provide loans under $50,000 [without Kiva].
But we have a lot of experience with the sector and we know there are businesses in that segment that will grow and that can become clients. That will help generate increased income levels in their communities.
We consider these enterprises to be engines of impact and change for smallholder producers and for agricultural laborers who need stable markets and steady work. But they’re often unable to access the capital and custom advisory that they need.
We can apply the principles that we use in our advisory services in the financial-management training, helping enterprises try to understand their financial statements; helping them make sound financial decisions based on financial analysis; and helping them fill out cash flow projections, set prices, and negotiate with buyers in a way that empowers them to grow over time.
CFN: What interest rates are you charging?
Carmichael: For Kiva, there are no interest rates. The client would go from Kiva’s zero-interest loan to Root Capital’s more commercially oriented loan in our portfolio.
For Root Capital, we work roughly within commercial rates and that vary enormously between countries. So Ghana would be very different from Mexico, for example. There’s a spectrum. However, we’re used to providing very straightforward loan products for this sector and segment. We don’t have hidden fees or fines. We’re trying to be very transparent with our rates so the client knows exactly what they’re getting.
Root Capital actually structures our loans to match our clients’ agricultural cycles during the year. This supports the cash flow of that agricultural cycle to keep product moving from the producer to the co-op and then to the buyer.
CFN: What are your environmental performance criteria?
Carmichael: We use a social and environmental scorecard during our due diligence.
Within the environmental scorecard, we have certain no-go zones. Activities that promote or create deforestation or high-pollution activities would be no-go zones.
In some cases, we might use certifications to gather data. And in other cases, there are no certifications available, so we invest further in due diligence ourselves. The level of impact that we see in a given case will have an effect on the interest rate.
Pierre: That’s why we’re with Root Capital.
CFN: How’s the demand for the program where you’re directing people toward Kiva?
Pierre: We know there's an incredible need for this type of short-term working-capital financing. I asked Root Capital not to send too many applicants. Kiva has a limitation on how much time we can spend vetting potential borrowers.
Carmichael:We haven’t been announcing it broadly. Right now, we’re hand-picking a small group of potential clients to try the pilot to try to understand in detail what would make it successful.
CFN: What are your plans for after the pilot phase?
Carmichael: We will build those plans as we better understand the results of the pilot. In one scenario, there could be five referrals per year, and in another, we could reach 100.
Right now, the goal is less about scale and more about building a solution that really meets the needs of this segment. It’s about activating a vision to help bring more small businesses the access to finance that they need to succeed.
Part of what’s exciting to us about this is that there are often many types of different development organizations working in the same geography with different capabilities and tactics, but because of the lack of alignment on their goals, they’re unable to work together to be bigger than the sum of their parts. Together, the Root Capital and Kiva collaboration’s impact could be bigger than the sum of its parts.
Note: The quotes by Elicia Carmichael have been edited after publication by their source.