Creative financing: growing your organic business

1. Creative financing: growing your organic business Tom Manley Canada’s Organic Farm Supply Business Presented at ACORN 2008

2. Creative Financing • Define a sustainable business. • Enumerate your capital needs. • Describe sources of capital, credit, grants. • Discuss taxes and incorporation. Presented at ACORN 2008

3. 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. Presented at ACORN 2008

4. 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. Presented at ACORN 2008

5. 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. Presented at ACORN 2008

6. A sustainable business • Is fair, honest, competitive, not charitable! • Has a healthy profit strategy. • Is balanced. • Customers • Products, services, prices and value • Employees • Wages, treatment • Owners • Profits, pay, ROI Presented at ACORN 2008

7. 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. Presented at ACORN 2008

8. Capital requirements • Fixed assets for purchases: • Buildings, land, vehicles, equipment. • Working capital for operations. • Business start-up costs. • Initial debt servicing costs. Presented at ACORN 2008

9. 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. Presented at ACORN 2008

10. 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. Presented at ACORN 2008

11. 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. Presented at ACORN 2008

12. 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. Presented at ACORN 2008

13. 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. Presented at ACORN 2008

14. 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. Presented at ACORN 2008

15. 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. Presented at ACORN 2008

16. 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. Presented at ACORN 2008

17. Sources of capital • Your personal capital • Commercial banks • SBLA, ACOA. PEI OIDP • Agricultural Adaptation Council • Regional economic development corporations • Private investors Presented at ACORN 2008

18. 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. Presented at ACORN 2008

19. 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. Presented at ACORN 2008

20. 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. Presented at ACORN 2008

21. 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. Presented at ACORN 2008

22. 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. Presented at ACORN 2008

23. 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. Presented at ACORN 2008

24. 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. Presented at ACORN 2008

25. 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. Presented at ACORN 2008

26. 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. Presented at ACORN 2008

27. 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! Presented at ACORN 2008

28. 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. Presented at ACORN 2008

29. 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. Presented at ACORN 2008