A value chain consists of a series of activities that add value to a final product, beginning with the production, continuing with the processing or elaborating of the final product, and ending with the marketing and sale to the consumer or end user. The inter-dependent linkages of the chain and the security of a market-driven demand for the final product can provide suppliers, producers, processors and marketing companies with more secure access to procurement and sale of products. This reduces costs and risks of doing business and improves access to finance as well as other services needed by those within the value chain.
Value chain finance is defined as the flows of funds to and among the various links within a value chain. Stated another way, it is any or all of the financial services, products and support services flowing to and/or through a value chain to address the needs and constraints of those involved in that chain, be it a need for finance, a need to secure sales, procure products, reduce risk and/or improve efficiency within the chain. Value chain finance is a comprehensive approach which looks not only at the direct borrower but rather analyzes the value chain and those within it, and their linkages in order to best structure financing according to those needs The linkages also allow financing to flow up and down the chain. For example, inputs can be provided to farmers and repaid directly from the sale of the product without having to go through a traditional loans process.
Numerous financial instruments have been adapted or developed to use in financing value chains. These include various trade finance instruments, warehouse receipts, factoring, etc. and risk mitigation products related to the product such as forward contracts and guarantees.
Understanding the conditions under which value chain finance works or doesn't work is useful for governments and donors as well as for lenders, agribusinesses and producer organizations interested in improving the supply of and access to finance for rural producers. For this reason, FAO organized a series of regional conferences to learn about and share the different examples and models that currently exist and apply them to other situations. This work has led to several publications, dialogue and research, Value chain finance and Archived conference materials. A comprehensive book by the Rural Infrastructure and Agro-industries Division, Agricultural Value Chain Finance: Tools and Lessons, which brings together the global learning, is available at Practical Action Publishing and on FAO document repository.