Raising Dough: Financing Your Farm or Food-Based Business

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Information about Raising Dough: Financing Your Farm or Food-Based Business
Business & Mgmt

Published on February 26, 2014

Author: elizabethu



In order to start or grow a farm of food-based business, you need money. Farmers have more financing options than ever before to raise capital for their farm-based businesses, but choosing which fundraising methods to pursue requires knowing how they work. In this track, learn the criteria, sweet spots, pros and cons, tips and techniques of the many financing options available. Complete with interactive exercises, success stories, and cautionary tales, discover what it takes to access the right kinds of capital for your farm. You’ll leave with steps you can take right away, whether you are currently seeking financing or don’t expect to for years to come.

Rebecca Thistlewaite, Sustain Consulting
Elizabeth Ü, Finance for Food
Bill Kitsch, Mid-Atlantic Farm Credit

Topics Covered:
--Clarifying Your Values & Prioritizing Business Investments
--Organizing Financial Records & Improving Your Credit Rating
--Cash Flow, Budgeting & Enterprise Analysis
--Overview of Financing Types & Laws to Keep in Mind
--Loans; Land Financing Options; Grants; Community Supported Models; Crowdfunding
--Social Capital: Why It’s Important & How to Build It
--Equity Financing

Presented at PASA's 23rd Annual Farming for the Future Conference: Letting Nature Lead. State College, PA. February 8, 2014

Raising Dough: Financing Your Farm & Food-Based Business     Rebecca  Thistlethwaite   Elizabeth  Ü   Bill  Kitsch     PASA’s  Farming  for  the  Future  Conference    February  6,  2014  in  State  College,  PA    

“Lack of Access to Capital”

Clarify Your Values

Clarify Your Values business?

Clarify Your Values •  •  •  •  •  •  Place   Control   Scale   Pace  of  growth   Financial  success  (…and  for  whom)   Time  horizon  

Clarify Your Values SupporLng  local  economy   “Organic”  (cerLfied  or  not?)   Humane  (cerLfied  or  not?)   PolluLon  reducLon   Renewable,  biodegradable,  recycled,  and/or   recyclable  packaging,  to-­‐go  ware,  (etc)   •  Animal  power   •  Biofuel(s)   •  •  •  •  • 

Clarify Your Values •  Local  purchasing   •  Transparency   •  Food  jusLce,  food  sovereignty,  food  security,   food  access   •  Job  creaLon  /  economic  development   •  Healthy  and  safe  condiLons  for  employees   •  CompensaLon,  benefit,  decision-­‐making   policies  

A Few Considerations Small  dollars                                                                              Millions  $$$   Inexpensive                                                                                              Expensive   Quick                                                                                            Takes  more  Cme   Li,le  paperwork                                              Lots  of  paperwork   Do  it  yourself                        Requires  professional  help   Easy  to  manage                          Lots  of  care  and  feeding   Good  for  introverts                    Needs  a  people  person   Lower  credit  score  OK                Good  credit  required  

Prioritizing Business Investments

What is Capital? Financial - the financial resources available to invest in a business; $$$ Social – relationships and networks that involve higher levels of interpersonal trust and norms of mutual aid and reciprocity which act as RESOURCES for individuals and facilitate collective action

“Fully 1/2 of all first purchases made by a consumer were influenced by social capital.” -from Social Capital Community Benchmark Survey, Harvard University, 2000 & 2006 RELATIONSHIPS MATTER

Why Social Capital? Lending a hand Lending money Borrowing & bartering Barn raising! Insurance policy Make friends and cooperators Mutual learning and improving practices Word of mouth marketing, referrals

Pete’s Greens barn fireJan. 2011, Craftsbury, VT

“Pete has a huge CSA, and a farmers’ market and self branded wholesale presence in Vermont. I think a lot has to do with the range of people who see themselves as connected to the farm —the size of the community from which the farmer can draw their support. For a dairy shipping milk, it seems that community is limited really to the people who personally know the farmer, whereas a direct-marketing farmer clearly has a much wider pool of people who feel invested in their farm.” – NOFA-VT

Building Social Capital -Take stock of your social networks -Share your values, walk your talk -Represent your ‘brand’ at all times -Connect with other farmers & like-minded businesses -Promote others, even competitors -Consider volunteering -Do lots of public speaking -Charitable donations & sponsor events

Building Social Capital cont… -Build a social media presence -Farm tours & videos to build connection with customers; transparency -Local media tour or local chef tour -School visits or bring kids out to farm -Join chamber or other business groups -Join boards of directors, steering committees, food policy council, etc

Building or Enhancing Credit •  Order a free credit report from •  Look for inaccuracies & problem areas •  Work on raising your score by: – Getting a small term loan (auto) & paying on time – Opening & managing 1-2 credit cards – Paying all bills on time, automate bill payments – Closing store cards

Budgets, Savings, & Income •  Develop a budget for your personal life & try sticking to it. •  Try to put a portion of your income into a savings instrument each month. This will test your financial resolve. •  Don’t quit your day job, particularly if you plan to apply for some sort of loan that needs to verify your income. •  Figure out your Debt:Income ratio. Ideally 36% or less (ie. $1,400 debt obligations/4,000 income/mo.).

Business Finances •  Open bank account in business name •  Don’t use business account for personal expenses •  If you want to pay yourself, you can either: 1) wait till the end of the year & draw from any net profits after taxes you realized, 2) take a regular ‘owners draw’ from gross profits to deposit into your personal account, or 3) put yourself on payroll. They all have different tax implications- ask an accountant what will make most sense for your business.

Taxes •  Start filing taxes as soon as you start a business. Schedule F is farm tax form, Schedule C is small business tax form for sole proprietorships. •  Don’t over exaggerate your business expenses just to get a bigger tax refund. This will come back to bite you if you ever want to get a loan, find investors, or sell the business. •  Develop a depreciation schedule for asset purchases & follow it (ie. $10K truck will last 10 years, thus depreciate $1K annually).

Record Keeping •  Keep track of all income and expenses •  Use boxes/folders/trays to house things temporarily •  Create folders for everything once you have reconciled them (after Quickbooks for example) •  Pay for all expenses using check or debit card, not cash. This provides a backup receipt. •  Write due dates on bills. Put them in order of payment in a place that you can see. •  If you don’t have time for regular bookkeeping, contract that out for 2-4 hours a month

The 5 C’s of Credit

5 C’s of Credit •  Character •  Capacity •  Capital •  Collateral •  Conditions

Character •  Integrity –  Personal and Professional •  Trustworthy –  Examples •  Business Plan –  Outline

Capacity •  Cash Flow –  Demonstrate your ability to repay the loan •  Projected Income –  How it will happen •  Expense Statement –  Demonstrate your ability to manage the expenses

Capital •  Net Worth –  Total Assets – Total Liabilities •  Resources –  Off Farm Income –  Outside Investors –  Government Loans –  Guarantees

Collateral Collateral is your ability to pledge assets •  Equipment •  Life of equipment must equal length of loan •  Livestock •  Real Estate

Conditions •  Economic Outlook •  Weather Patterns •  Potential for Flood Conditions can be anything that puts your success at risk.

Credit Score (the 6th C of Credit) •  A number used to estimate your credit risk •  The score is calculated from your credit report •  FICO (Fair Isaac Corporation) –  Used most by lenders –  3 major credit reporting agencies: Equifax, Experian, TransUnion –  Scores range from 300 - 850

Credit Score •  Ways to improve your credit score –  Apply for new credit accounts only as needed –  Manage revolving accounts responsibly –  Pay on time –  Be sure closed accounts no longer active –  Check your free credit report annually:

Bill Kitsch Sales Manager THANK YOU Nmls #662745

Financial Statements •  Profit & Loss (Income Statement) should be updated monthly •  Balance Sheet (Shows net worth & biz equity) should be completed 1 x a year, at the same time of year (i.e. 7th of each January) •  Cash Flow Budget should be completed 1 x a year right before new year (or fiscal year) •  Ideally, compare your monthly P & L with your budget to see where cost overruns or income shortfalls might lie. Work on problem areas immediately, don’t wait.

Income/Profit & Loss Statement Revenues      FM  Sales    Farmstand    Restaurants    Grocer      subtotals    Less  COGS    Gross  Profit     OperaCng  Expenses    Insurance    ULliLes    Rent      DepreciaLon    Hired  Labor    Repairs  &  Maint.  Gas,  fuel,  &  oil    Property  taxes    Vet  &  Medicine  Supplies    Interest  Expenses  subtotals       Net  Profits  before  taxes Est.  tax  liability  30%   Est.  Net  Profits        Veggies  22,000    8,000    5,000    12,000    47,000    25,000    22,000                    Eggs    10,000    4,000    0    0    14,000    10,000    4,000    Meat    33,000    6,000    3,000    0    42,000    22,000    20,000    Total    65,000    18,000    8,000    12,000    103,000  57,000    46,000      Veggies  500    200    500    1000    1000    150    300    n/a    n/a    500    500    4,650                              Eggs  200  300  100  200  300  20  50  n/a  20  100  500  1,790  Meat  700  400  1000  200  500  30  400  n/a  100  150  500  3,980                            Total    1,400    900    1,600    1,400    1,800    200    750      n/a    120    750    1,500    10,420    17,350                  2,210            16,020            35,580    -­‐10,674    24,906                                            

Enterprise Profitability Enterprise Net Profits $17,350 Hours of Labor 630 Profits per Hour $27.54/hour Vegetables Eggs $2,210 364 $6.07/hour Meat $16,020 520 $30.81/hour

Balance Sheet

Cash Flow Budget Item Jan Feb March April May Income Farmers Markets 6,500 Farmstand 800 2,000 Restaurants 600 1,200 Grocer 2,000 Total 0 0 0 1,400 11,700 COGS 800 1,200 3,000 3,400 5,000 Gross Profits -800 -1,200 -3,000 -2,000 6,700 75 50 Expenses Insurance Utilities 700 100 100 100

Intermediary Institutions / Commercial Lenders  

Other  Institutions

Direct Investments

A Farm / Business Needs All of These

…and It Gets Complicated.

Types of Financial Capital Fixed/Asset Capital - $ for assets that will remain permanently with the business to help it earn income. Ex- land, buildings, greenhouses, processing plant, feed mill Working/Operating Capital - money used for running the business day to day. Ex- seed, fertilizer, fuel, utilities, labor, packaging

Intermediary Institutions / Commercial Lenders  

Conventional Sources of Debt Financing Short-term: credit cards, annual operating loan, extended terms Medium-term: bank loan, USDA operating loan, SBA loan, line of credit Long-term: mortgage, refinance, USDA farm ownership loan

Other Forms of Financing

Other Forms of Financing •  •  •  •  •  •  •  Friends & Family Loans USDA REAP or Conservation Loans Owner Financing / Land Contract Peer-to-Peer Lending Various Forms of Crowdfunding Convertible Debt Equity Financing

Cooperative Financing •  Each member-owner makes a financial contribution or a sweat-equity contribution or combo of both •  Helps spread risk, more resistant to economic booms & busts, assures more stable supply •  Owners receive annual patronage dividends or choose to reinvest back into business •  Good way for small-scale producers to ‘scaleup’ & build necessary infrastructure

Grant & Cost-Share Programs •  Not free $- costs $ to apply, manage, report •  Very competitive in most cases •  Most reimburse for funds already spent- do you have cash flow for this? Or require 1:1 cash match •  Require good record-keeping, bookkeeping, & reporting •  Ex. USDA REAP, VAPG, FMPP, CIG, EQIP, CSP, CRP, WRP, SARE, & others

Direct Loans

Friend & Family Loans

Peer-to-Peer Lending

Kiva Zip = Peer to Peer + Intermediary

Land Financing Options •  •  •  •  •  •  Conventional Mortgage USDA/Farm Credit Loans Owner Financing Lease-to-Own/Land Contract Buy with Conservation Easement Partial ownership with land trust

Conventional Mortgage

Conventional Mortgage •  Does not work for raw land unless you plan to build a residence within certain time frame •  If there is a residence, do you have to call it a “farm”? The “F-Word” to lenders •  Certain lenders, such as VA, forbid lending for farms period •  Will require stable income, usually off-farm •  Do you have a long-term relationship with lender? •  Are you a first time land buyer? Do you have a sizable down-payment? If not, move on…

USDA Farm Service Agency -You must 1st apply for commercial creditIf they reject you, you can apply to FSA for: Farm Ownership Loans- up to $300K for direct or $1.35 million for guarantee, up to 40 year payback Downpayment Loans- applicant must make at least 5% down, max amount is 45% of purchase price, up to 20 year payback

Owner Financing

Owner Financing •  Great for properties that may not be commercially financeable or when a farmer does not qualify for a traditional loan •  Terms negotiated between landowner and buyer, such as downpayment required, interest rate, and timeline •  Promissory note drawn up, reviewed by lawyers and title company •  Downpayment made to landowner, monthly payments with interest made to landowner •  Title conveyed to buyer, but original owner has lien on property in case of default.

Lease-to-Own/Land Contract •  Another form of owner-financing, but title remains with original landowner until property is fully paid off •  May or may not require downpayment but does require monthly payments with interest •  You can apply for a land contract guarantee with FSA if you are a beginning farmer or socially-disadvantaged farmer, up to 90 % of purchase price

Conservation Easements & Other Partnerships

Buy with Conservation Easement Either find a piece of land that might have an easement value (high habit value or high development pressure) and then find a land trust that might be interested or, talk to your local land trust about any properties they are thinking of protecting (or already own) and if they would be willing to partner with a conservation-minded buyer such as yourself. Ex- Elkhorn Slough land trust paid $1 million for development rights, ALBA financed the remainder with a 250K loan on 200 acre property

Partial Ownership w/Land Trust Farmer owns ‘improvements’ while land trust owns land. Farmer leases the land back from land trust at an affordable rate via a long-term lease. Ex. Kirsop Farm near Seattle. Farmers owns house & buildings, land trust owns land. Leases back to farmers for 99 years.

Focus on Other  Institutions

Government Grants Grants-­‐  $  given  to  an  enLty,  not  required  to  pay   back  (VAPG,  RBEG,  FMPP,  SBIR,  SARE,  REAP)     Loans-­‐  $  lent  to  an  enLty,  required  to  pay  back   (REAP,  Farm  Storage  Facility  Loans,  B  &  I     Cost-­‐Share  Programs-­‐  $  reimbursed  to  enLty   aker  they  complete  a  project  &  submit  receipts   (EQIP,  CSP,  WRP)        

Foundation Grants

Community Supported Models

Community Supported Models

Live Power Community Farm, California CSA  members  organized  and  contributed  towards   the  ConservaLon  Easement  owned  by  Equity  Trust,   allowing  the  Decators  to  purchase  their  40  acre   farm  for  less  money  

TLC Ranch, California Egg  Share  customers  purchased  $500  credits  for   eggs,  redeemable  over  2  years  for  100  dozen  eggs.   Raised  $25,000  in  three  weeks  from  50  families  in   order  to  purchase  a  refrigerated  delivery  van  and   new  farm  truck  

CSA Financing Models: Misty Brook Farm, Maine 15  private  loans  to  purchase  house  plus  2  acres   •  10-­‐15  year  terms   •  interest  rates  vary  by  lender,  none  more  than   5%,  several  earn  interest  in  food  credits  

Crowdfunding: 3 Different Types!!! 1.  SoliciLng  giks     2.  Pre-­‐purchase  /   Community  Supported   models     3.  Selling  securi8es  to  a  large  number  of   investors  who  expect  a  financial  return    

Online Crowdfunding

Asking the Public for Loans

Which Type of Crowdfunding? 1.  SoliciLng  giks     2.  Pre-­‐purchase  /   Community  Supported   models     3.  Selling  securi8es  to  a  large  number  of   investors  who  expect  a  financial  return    

Direct Public Offerings •  It’s  not  a  form  of  security;  it’s  a  way  for  a   company  to  offer  a  security    

Equity Financing

Equity Financing

Equity Financing •  You  sell  stock  in  your  company.  Investors   become  shareholders,  and  they  want  their   money  back  at  some  point.   •  …they  usually  also  want  some  control  over   how  you  run  the  company  in  the  meanLme.  

Equity Innovations •  Non-­‐voLng  preferred   stock   •  Stock  doesn’t  appreciate   in  value  as  company  grows   •  Investors  receive  fixed   dividend  

How Will YOU Raise Money?

Elevator Pitch Time! 1.  2  minutes  of  individual  prep  Lme   2.  Take  turns  giving  1-­‐minute  pitch     Pitch  includes:   •  DescripLon  of  the  business  NOW   •  Your  intenLons  for  the  FUTURE   •  A  specific  request  or  ASK  

Affordable Legal Counsel? Jason Foscolo, Fare Grange Law, Drake Agricultural Law Center, Farm Commons,        

rebecca@   831-­‐682-­‐6812   @farmbizfuture   elizabeth@   415.891.9194   @foodfinance  

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