raising dough: financing your farm or food-based business

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

Inexpensive Expensive

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

Quick Takes more Cme

Lower credit score OK Good credit required

Small dollars Millions $$$

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 fire- Jan. 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

THANK YOU

Bill Kitsch Sales Manager

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 Veggies Eggs Meat Total

FM Sales 22,000 10,000 33,000 65,000 Farmstand 8,000 4,000 6,000 18,000 Restaurants 5,000 0 3,000 8,000 Grocer 12,000 0 0 12,000 subtotals 47,000 14,000 42,000 103,000 Less COGS 25,000 10,000 22,000 57,000 Gross Profit 22,000 4,000 20,000 46,000

OperaCng Expenses Veggies Eggs Meat Total

Insurance 500 200 700 1,400 ULliLes 200 300 400 900 Rent 500 100 1000 1,600 DepreciaLon 1000 200 200 1,400 Hired Labor 1000 300 500 1,800 Repairs & Maint. 150 20 30 200 Gas, fuel, & oil 300 50 400 750 Property taxes n/a n/a n/a n/a Vet & Medicine n/a 20 100 120 Supplies 500 100 150 750 Interest Expenses 500 500 500 1,500 subtotals 4,650 1,790 3,980 10,420

Net Profits before taxes 17,350 2,210 16,020 35,580 Est. tax liability 30% -‐10,674 Est. Net Profits 24,906

Enterprise Profitability

Enterprise Net Profits Hours of Labor

Profits per Hour

Vegetables $17,350 630 $27.54/hour

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

Expenses

Insurance 700

Utilities 100 100 100 75 50

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 ‘scale-up’ & 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

www.usda.gov/knowyourfarmer

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 credit-

If 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

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

www.financeforfood.com

•  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, http://www.foodlawfirm.com/ Fare Grange Law, http://www.faregrange.com Drake Agricultural Law Center, http://directmarketersforum.org/ Farm Commons, http://farmcommons.org/

elizabeth@ financeforfood.com

415.891.9194 @foodfinance

rebecca@ sustainconsulLng.com

831-‐682-‐6812 @farmbizfuture