Creative financing: growing your organic business

Presented at ACORN 2008 1

Creative financing: growing your organic business

Tom Manley

Canada’s Organic Farm Supply Business


Creative Financing

» Define a sustainable business.

» Enumerate your capital needs.

» Describe sources of capital, credit, grants.

» Discuss taxes and incorporation.


Homestead Organics

» Organic grain elevator: Receiving, storage, marketing. Precision cleaning for food and feed markets. Markets in Canada and the USA.

» Organic feed mill: mixed feeds for all farm livestock. Customers & dealers: eastern Canada, New York.

» Organic farm supplies: seed, supplements, pest controls.» Organic food and book store.


Why me?

» I am not an expert, but I have learned a lot: 7 years in Bell Canada sales and marketing. Several business management courses.

» Homestead Organics: Incorporated 1997. From 250K$ to 4M$ in ten years. 7 employees; 800K$ capital assets.

» But caution: every situation is different. Not all the material presented will suite your case.


Why do most businesses fail?

» Insufficient capital financing for start up. They literally run out of money.

» Poor pricing and market strategy.» Poor management practices.» Poor competitive strengths.» Owner gets tired and quits:

Not making any money. Working too hard.


A sustainable business

» Is fair, honest, competitive, not charitable!

» Has a healthy profit strategy.

» Is balanced.

Employees•Wages, treatment

Owners•Profits, pay, ROI

Customers•Products, services, prices and value


What is profit?

» Who said that profit is bad? Fair, equitable, competitive profit is good.

» Owner’s take home pay: Fair wage for skilled labour. Compensation for risk and initiative. Return on capital investment.

» Profit is required for growth. And recovery from problems.


Capital requirements

» Fixed assets for purchases: Buildings, land, vehicles, equipment.

» Working capital for operations.

» Business start-up costs.

» Initial debt servicing costs.


Fixed Assets

» Purchase financing versus leasing.

» Time sharing a processing facility.

» Sub-contracting to custom growers/processors.

» Used versus new equipment.

» Equipment sharing and joint ownership.

» Unforeseen construction costs and fees.


Working Capital

» Often underestimated; will limit growth.

» Tied up in your cash flow of one cycle: Accounts receivable and payable. Inventory and supplies; keep suppliers happy. Rent, mortgage, utilities, wages for the cycle. Reserve for opportunistic bulk purchases. Reserve for repairs and maintenance projects.

» Cover operating losses ‘til cash flow positive.


To Reduce Working Capital

» Negotiate better terms with suppliers.

» Shorter terms with customers: In advance, COD; early payment discounts Late payment penalties; vigilent in collections.

» Reduced inventory; Just-in-Time inventory.

» Mortgage payments at the end of the month.

» Annual maintenance fees.

» Wage hold back.


Customers could be your enemy!

» This is business – we are not friends!

» AR will drain your cash flow and your sanity.

» Build high cost of AR into your price: Credit verifications, lost sleep. Internal collection efforts; external agencies. 1% Bad debt; interest cost on late income.

» Have a tight policy and be a persistent.


There is help with AR

» Export Development Corporation

» Accounts Receivable insurance: Costs about 1% of sales on credit. By territory: Canada, USA, overseas. Need thorough credit checks on customers. They cover 90% of uncollected AR. Can avoid the cost of a collection agency.


Capital for Business Start-up

» Incorporation and other legal fees.» Launch marketing:

Logo, website, stationary, labels, packaging.

» Staffing costs: Wages for consultants, staff for setup, training, recruitment. Policies and procedures, product design and testing. First month of operating expenses.

» Deposits on leases, supplies, equipment, contractors.


Capital for Debt Servicing

» Until the business becomes cash flow positive.

» You need capital to: refund debts, pay interest, pay dividends on class A shares.

» You need to borrow money to pay the lenders. Borrow from Peter to pay Paul.


Financial Ratios

» Return on investment: like interest rates, annual compounded return.

» Debt to equity ratio: Mortgages and long term debt versus your equity. The bank does not want to own your business.

» Current ratio: Current liabilities versus current assets Enough liquid assets to cover your obligations.


Sources of capital

» Your personal capital

» Commercial banks

» SBLA, ACOA. PEI OIDP

» Agricultural Adaptation Council

» Regional economic development corporations

» Private investors


Your Personal Capital

» Get a good education.

» Get a good job for 15 years.

» Get lots of skills and experience.

» Save all your money.

» Walk into your business with $100,000

» Keep your house & RRSPs out of the business. Don’t put all your eggs in one basket.


Commercial Banks

» All they want is: Security, liquid security, full security. Personal loan guarantees, co-signers. Do not want to finance more than 50%.

» Most businesses fail and they know it?

» Your business plan only gets you in for a chat!

» They offer the best interest rates if you qualify.


Government Lenders:

They are no different from banks.» But may take more risk.

FCC now available to agri-business, on farm processing, food processors.

BDC usually only takes on a business after 2 years of existence.

ACOA develops industry & jobs in the Maritimes.» Up to 50% of capital cost, no interest, no guarantee.


SBLA

» Small Business Loans Act guarantee: Now: Canada Small Business Financing Program. Federal govt protection for small businesses.

» Guarantees 85% of your loan. Farms not eligible.

» Finance 90% of capital assets up to $250,000.

» May require 25% personal guarantee.

» Costs 2% registration fee and Prime +3%.

Apply through your bank» Many banks don’t want to use it – laborious & risky.

» Banks use it on a mortgage against fixed assets.


Junk Mail !!!

» Every bank and credit card will solicit you.» They offer promotions for small businesses:

Low interest rates, prime +3% Credit cards with checks, small loads, L of Credit. Application by mail, no business plan. Actually sent as a personal credit card.

» But manage your credit wisely.» Makes your credit file look risky.


Leasing

» Manufacturer more willing than the bank. Also look for capital leasing companies. Need a couple of years experience to apply. May not cover the full cost of installation. Usually short term 3-5 years, not 20 years.

» Is not a debt; protects debt-equity ratio. Risk and obligations need to be detailed. Fully tax deductible, not depreciated. Flexible terms, front or rear loaded.


Economic Devt Corps

» Established in every region or county.

» Bank of last resort: They take more risk. You spend time getting turned down by the banks. Interest rates may be higher.

» They want job creation projects.

» Available as lender or equity partner.


Grants?

» Agricultural Adaptation Council. Associations and networks, not individuals. For marketing, research, business development.

» Industry Research Assistance Program (IRAP) Max $15,000 applied & commercial research.

» PEI Organic Industry Development Program Max $100,000, businesses and network. Capital projects and business development.


Private Capital

» Family, friends, customers, suppliers, strangers: Don’t be shy. It is an investment, not a call for help.

» Keep it small; wait till you have experience.» Private loans are easy to manage:

Simple promissory note, not guaranteed. Losses can be tax deductible by the lender. Stagger your payout schedule to ease cash flow. Interest paid: tax deductible by you, taxable for them. Interest rate between bank deposits and bank loans. No access to companies affairs.


Other Shareholders

» Must be incorporated.» Common shareholders - the real owners, full risk.

Need to negotiate a shareholders agreement. They can join your board of directors.

» Preferred Shareholders – the fake owners, low risk. No management, no board, no involvement. Usually fixed annual dividend rate.

» Dividends paid: taxable at the company, dividend tax credit for the investor.

» Shares make the debt-equity ratio look better!


To Incorporate or Not?

» Separate the business assets & finances.

» Most lenders, leasers want incorporation.

» May still need to sign personal guarantees. Protects your from creditors, but not banks.

» Separate income tax reports and due dates. Small business income tax rate is lower.

» Flexible income options: dividends, wages.


Reducing taxes

» Incorporation: less than 20% tax rate.

» Dividends offer dividend tax credit.

» Charge mileage for the personal vehicle. High mileage payments can replace some income.

» Rent a home office to the company.

» $3500 wage is below the CPP minimum.

Documents

Creative financing: growing your organic business