Financing Gap of Agro-food Firms and the Role of Policies

Abstract

The objective of this paper is to evaluate the position and financing needs of agri-food industry in Slovakia. There is a growth of agri-food sector which is reflected in growing demand for finance. Despite current favourable conditions on the financial market in Slovakia, some viable firms still face a credit constraint. Financing gap exists due to relatively high interest rates for some firms and due to their lack of sufficient collateral. Based on the survey results and focus group meetings we estimate the financing gap. Results show that there is potential for a further expansion of the financing market, with a financing gap estimated at EUR 36.8 mil. Small firms suffer the most from the financing gap and they constitute 77.4% of the gap. Financing gap and financing needs will be growing in the future. Firms need to increase investment to stay competitive on the market and need to adopt to changes in consumer preferences. This requires further investment into new technology and equipment. Tougher environmental requirements make firms invest into more environmentally friendly production processes. Furthermore, the sector is expected to be growing in the future. Financial instruments in the form of loan guarantees and interest rate subsidies would partly eliminate the existing financing gap. Small firms would benefit from simple and flexible financial instruments serving as guarantees for loans. Large firms would benefit from long-term loans supported by financial instruments. Policy-makers should place special attention on the use of financial instruments in agri-food sub-sectors with potential high value added and high employment.