Root Capital: partnering with small and growing agribusinesses to address social and environmental challenges

Root Capital supports agricultural enterprises across Latin America, sub-Saharan Africa and Southeast Asia via a ‘credit plus capacity’ approach. It helps grow enterprises that need more credit than microfinance, but which are too risky for commercial bank loans. Founded in 1999, Root Capital has distributed US$1.96 billion to over 843 enterprises, collectively benefiting 2.4 million rural families. 

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A coffee crop is being dried (Photo: Root Capital)

Root Capital invests in the growth and resilience of agricultural enterprises so they can transform rural communities. It works within coffee, cocoa, tree nuts, grains and other staple crop production. Investment often starts with free advisory services to businesses with high impact potential, but which are not yet ready to apply or manage external financing. 

Alejandro Albujar, a Root Capital loan officer in Peru, says: “The farmers and the general managers of the co-ops are the base of our work. We go up to the top of the mountain with them, we see their crops, and they realise that we care and that we love what they are doing”.

Root Capital has a blended finance model that includes investor capital, donor capital and specialised risk-sharing instruments. The donors do not expect returns on their money. Investors know they may get below-market returns.

Providing tailored capacity building to enterprises with aligned vision 

Root Capital combines loaning financial capital with providing customised training in financial management, governance, agronomy and climate resilience, gender equity and more. Services, which are tailored to the client’s needs, can cover business management, digital business intelligence, agronomic and climate resilience, gender equity and youth inclusion.

Leonor Gutiérrez, director of the Root Capital Women in Agriculture Initiative, said: "[Our approach] is about breaking barriers, of becoming better… but more than anything, with a true belief that this can be done, that the systems can be changed – that we can design for inclusion.

Root Capital’s advisory services can help their clients be ready to take on loans and other investments in the future. With access to financing, businesses are able to grow and thrive. On average, Root Capital loans help borrowers increase their revenue by 20% per year, and 42% of borrowers gain access to commercial finance within three years.

Identifying enterprises to partner with

Local teams, including the local loan officers, play an important role in identifying new borrowers. Root Capital also gets referrals from existing borrowers and applications through its website. 

Loan applicants must be companies that are legally established in Root Capital’s 13 countries of operation (including some of the world’s most economically and environmentally vulnerable places). Companies must have been running for three years, have audited or management-prepared annual financial statements, have a minimum revenue of $250,000 and have strong relationships with established buyers and at least two professional references.

As well as credit due diligence, Root Capital carries out ‘impact due diligence’ to predict a business’ likely social and environmental impacts. This includes a ‘negative screen’ to ensure businesses are not engaged in practices that might damage communities or the environment. Businesses must have a leadership team with demonstrated track record of business success and positive impact on smallholder farmers, employees and/or the environment.

Filling a finance gap

Root Capital disbursed over $110 million in loans to agribusinesses in 2023, with 91% of loans filling financing gaps unmet by commercial lenders. As an ‘impact-first’ lender, it prioritises loans to high-potential businesses, even if they are early-stage and don’t have much experience with formal borrowing. 

Root Capital uses businesses’ sales contracts to mitigate risk, rather than insisting on the collateral (such as valuable equipment or properties) often required by commercial banks. It pre-finances businesses using purchase orders from international buyers. The buyers make payments to Root Capital once goods are exported. Root Capital then remits payments to its loan-holders, after deducting the loan principal and interest.

Making money work for social and environmental goods 

Businesses typically pass on 80% of their revenues to farmers, meaning business growth translates into income growth for growers. 

An independent study of Root Capital’s portfolio found that loan-holders bought 33% more products from smallholder farmers at approximately 12% higher prices than would have been the case without Root Capital’s financing. 

Three women happily showing their coffee plant.

Coffee growers (Photo: Root Capital)

Moreover, in 2023, 61% of borrowers had made efforts to become gender inclusive, and 54% were making substantial investments in climate change mitigation or adaptation. 

For example, Root Capital loan-holders may be supporting organic agroforestry coffee, and these farms often capture more carbon than they emit. 

Fostering learning through participatory impact evaluation 

To measure the actual impact of its investments, Root Capital conducts in-depth, participatory and client-centred evaluations on a selection of borrowers. Root Capital bears the costs, and clients are full participants. They are invited to take part, and the evaluation only proceeds if the client also sees value in it. 

Clients help design, implement and analyse impact evaluations, and they and their affiliated farmers can share and use the data and results. Evaluations employ rigorous methods, such as econometric analysis, without generating an additional burden for the business.

Root Capital’s in-house impact team also often partners with funders that want to use impact evaluations to generate evidence on specific practices, such as how best to improve rural finance. Evaluation helps Root Capital check that its programmes and services are fulfilling their theory of change and test new products or services for effectiveness and scalability.

Head and shoulders photo of Nicola Sorsby.

Nicola Sorsby ([email protected]) is a researcher (nature-climate) with IIED's Natural Resources/Climate Change research groups