For produce farmers, the toughest row to hoe is securing a loan against their crops. Financial institutions find produce difficult to collateralize because it generally expires a month after harvest.
But one fintech platform is disrupting traditional finance rules in the farm-to-table process and has reaped millions in new funding by doing so.
ProducePay provides immediate access to financing for farmers and distributors in the United States, Mexico, Canada, Honduras and Chile for fresh produce sold in the United States. Founded in 2015, ProducePay has financed over $850 million of produce in under four years. In 2017, the company financed $400 million of produce, up from $17 million in 2015.
The startup recently raised $14 million in Series B funding, led by the venture capital firm Anterra Capital, with participation from Rabo Frontier Ventures (a Rabobank venture investment fund), CoVenture, Social Leverage, FJ Labs, Greenhouse Capital, Moonshots Capital and Tribeca Angels.
“Most of the banks are able to lend against hard assets: the tractor, your property. What they can’t and haven’t been able to do is provide financing to the most valuable asset, which is the crop itself,” said Brian Harwitt, vice president at CoVenture. “The technology has enabled the perishable produce to be a financeable asset.”
The startup is built on helping farmers through the harvest season, said Ben Dusastre, co-founder and chief financial officer of ProducePay.
“A farmer needs money to take stuff out of the ground,” Dusastre said. “He needs to harvest and package it, and he needs to ship it. Then he goes to a distributor and that distributor will go and sell that product to a retailer. By the time the money gets from the retailer to the distributor and to the farmer, the farmer can be halfway to maybe more than halfway done with his harvest and yet needs a lot of capital to take that produce out of the ground.”
Banks may also finance harvesting if a farmer submits a Uniform Commercial Code filing, which is a notice that a lender has a security interest in one or more of a company’s assets and gives the financier the first lien on any crops produced, said Ken Ramos, a business banking regional manager for Wells Fargo in Fresno, Calif.
“Chances are someone has provided the working capital to finance it to the point of harvest,” Ramos said. “The initial working capital tends to be one and the same to provide the harvesting to bring it out of the ground.”
Ramos looks for farmers to already have a distributor before lending to them. “I don’t care where they get their contacts from, they need to have a written agreement with the end buyer of their crop,” he said.
ProducePay, however, has more recourse than banks under the Perishable Agricultural Commodities Act, where wholesalers are given super-senior liens against distributors or farmers that don’t pay invoices.
“A lot of banks don’t like lending in this space because they know you can be the senior lender and all of a sudden the wholesaler or distributor may be able to claim a super-senior lien because the farmer or the distributor did not pay off,” Harwitt said.
Historically, produce distributors have often filled this gap by becoming de facto lenders.
“The distributors don’t really want to be in the lending business,” said John McEvoy, investment committee member at Tribeca Angels. “They prefer to get paid for doing their core function, which is to take produce from one person and giving it to the next to sell without standing in the middle as principal.”
With the new funding, ProducePay plans to expand its direct-sales team and further develop a platform that connects farmers and distributors. It will need to further differentiate itself from competitors like the Farmers Business Network, Mercaris and Agrofy, said Michael Wholey, an analyst at CB Insights.
Currently, the startup has credit facilities with hedge funds, including CoVenture, which is the company’s largest equity shareholder. In the future, it may move to borrowing from banks which offer cheaper capital but are more risk-averse. Dusastre said he is also open to partnering with banks.
“ProducePay has an interesting opportunity to provide an additional layer of financing which banks can’t provide,” Harwitt said. “Banks can send their farming clients to ProducePay to say, we can’t provide that additional capital but maybe we partner with ProducePay and earn some origination fee or we can use it as another value-add relationship perspective.”
If the company can get banking regulators comfortable with its risk profile, then it would have the option of being sold to an agricultural bank and becoming one of its specialty financing arms, Harwitt added.
“ProducePay offers a solution that perfectly fits the food and [agricultural] ambitions of Rabobank. Their service addresses a significant pain point in the fresh produce value chain,” Harrie Vollaard, head of Rabo Frontier Ventures at Rabobank, said in a press release.
Harwitt says the company’s most valuable technology is its trading platform, which allows distributors to find new sources of product and allows farmers to find new customers.
“Trade is still being conducted over the phone, email, text messages and through fax,” said Dusastre. “There hasn’t been a central electronic marketplace.”
