Published on February 26, 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 www.annualcreditreport.com • 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: annualcreditreport.com
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
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
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
Friend & Family Loans
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 • 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 • 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)
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
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 • 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. www.ﬁnanceforfood.com
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, http://www.foodlawfirm.com/ Fare Grange Law, http://www.faregrange.com Drake Agricultural Law Center, http://directmarketersforum.org/ Farm Commons, http://farmcommons.org/
rebecca@ sustainconsulLng.com 831-‐682-‐6812 @farmbizfuture elizabeth@ ﬁnanceforfood.com 415.891.9194 @foodﬁnance
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