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FINANCING VALUE ADDED -- GETTING THE GREEN LIGHT FROM YOUR BANKER

FINANCING VALUE ADDED -- GETTING THE GREEN LIGHT FROM YOUR BANKER. Jeff Kistner Business Development CoBank 1.800.346.5717 ext. 2025 jkistner@cobank.com. THE ADDED VALUE EQUATION. Strengths - Weaknesses > Uncertainties. WHAT DOES IT TAKE TO ATTRACT FINANCING?. C apacity--Repayment ability

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FINANCING VALUE ADDED -- GETTING THE GREEN LIGHT FROM YOUR BANKER

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  1. FINANCING VALUE ADDED --GETTING THE GREEN LIGHTFROM YOUR BANKER Jeff KistnerBusiness DevelopmentCoBank 1.800.346.5717 ext. 2025 jkistner@cobank.com

  2. THE ADDED VALUE EQUATION Strengths - Weaknesses > Uncertainties

  3. WHAT DOES IT TAKE TO ATTRACT FINANCING? • Capacity--Repayment ability • Capital--Financial condition • Character--Management • Collateral--Quality and value • Conditions--Purpose, amount and requirements • External • Internal

  4. START UP STAGES FOR ADDED VALUE • Membership drive • Annual meeting • Finance project • Feasibility study • Economic, Market • Technical, Financial • Management • Hire manager • Project construction • Begin operation • Initial meeting • Organization formed • Pre-Feasibility study • Secure seed money • Develop business plan • Operation plan • Marketing plan • Management plan • Financial plan • Develop prospectus

  5. CONDUCT FEASIBILITY STUDY Use third-party assistance Market analysis/Marketing plan: Supply and demand characteristics (inputs & output) Market share Pricing trends and sensitivity for finished goodsand raw material Transportation of products and raw materials Response of competitors to additional supplies/suppliers Technology employed Relative cost competitiveness

  6. FEASIBILITY STUDY (CONT.) • Ease of market entry • Contracts with buyers • Realistic income projections • “What if” assessment • Worst / best casescenarios • Capitalization

  7. COMPREHENSIVE BUSINESS PLAN • Markets • Who • What • How much • Management • Board or local leadership • Operational • Money • Capital • Cash flow

  8. MARKETING ELEMENTS OF BUSINESS PLAN • Marketing plan • Strategic and tactical orientation • Who are your customers, competitors? • Distribution channels • Alliances and partnering • Nature of marketing contract(s) - legal review • Contingencies / back up plans

  9. MANAGEMENT ELEMENTS OF BUSINESS PLAN • Operating plan • Building facilities • Utilize engineers and technology experts • Plan for cost overruns (minimum of 10%) • Select management • Broad-based search • Employee early in process • Compensate to attract the best • Reward based on long-term results

  10. MONEY ELEMENTS OF BUSINESS PLAN • Financial plan • Return on Investment • Equity • Debt • Guarantees? And now more about DEBT...

  11. RISK AND RETURN--WHAT ADDS VALUE FOR YOU? • Return on investment? • Should equity investors expect 15% for a value-added venture? • Higher target w/ venture capital involved - 20%-25% • Return for additional expense? • Investor analysis should not include return from the sale of any raw material input - Project basis only! • Ability to stay on the farm? When should you expect to break even with a new venture? Three years?

  12. Plan to have 40-60% equity ITEMS TO CONSIDER WHEN PLANNING A VALUE-ADDED PROJECT • Total cost of plant, property and equipment • Start up expense planning to full capacity period • Beginning working capital

  13. CAPACITY--REPAYMENT ABILITYDEPENDS ON... • General condition of the economy • Competition • The need for goods and services sold • Technical changes in the industry • Regulatory climate • Cyclical nature of the industry • Environmental or other threats

  14. KEYS TO SUCCESS • Leadership - Local investors; JV partners; project manager • Excellent management • Sound business and marketing plan • Excellent risk management plan and execution - solid contracts • Well capitalized to cushion unplanned adversity • Communications with investors: frequent, open, honest • Remember to focus on value of your stock, not just return to products committed • Remembering your no longer a commodity or livestock producer, but that added value processor

  15. Jeff KistnerBusiness Development CoBank 1.800.346.5717 ext. 2025 jkistner@cobank.com

  16. Start-up Assistance Information on Sources of Start-up Assistance Jeff Jobe Cooperative Services USDA Rural Development (515) 284-5192 jeff.jobe@ia.usda.gov

  17. Technical Assistance Resources • Iowa State University Extension to Value-Added • Iowa Institute for Cooperatives • CoBank’s Business Advisory Services • AgMRC: visit their site at agmrc.org for a complete list of consultants

  18. State Funding

  19. Value Added Agricultural Products and Processes Financial Assistance Program (VAAPFAP) Joe Jones Iowa Department of Economic Development June 5, 2002

  20. VAAPFAP • Created in 1994 • Primary Purposes: • Renewable Fuels • Innovative Products and Processes • Project Creation

  21. Program Operations • Funds awarded as Loan/Forgivable Loan • Generally $20,000 or less is a grant or forgivable loan • Over $20,000 is combination loan/forgivable loan • Maximum award is 25% of annual appropriation • Higher the award, the higher the loan portion • 141 projects awarded to date (September 2001) • two-thirds of counties represented to date

  22. Program Rules • Application – Complete Business Plan • Ag Products Advisory Council recommends to Director of IDED • Cannot fund production agriculture • Facilities must be located in State

  23. VAAPFAP Assistance Project Creation Assistance: • Focus on Strategic Initiatives affecting broad ag interests • Requires consultation with major agricultural organizations • May utilize 20% of annual appropriation

  24. VAAPFAP Initiatives Project Creation - Strategic Initiatives: • Research and feasibility studies to address significant new opportunities • Organization of collaborative ventures among Iowa farm operators • Livestock waste management and food quality assurance issues • Development of systems to manage identity preserved grains • Cooperative programs for advanced plant or animal biotechnology • Development and marketing of new food products utilizing soybeans • Innovative agricultural risk management projects

  25. Contact Information • Web - www.iowasmart.com/financial.htm#vaapfap • E-mail – joe.jones@ided.state.ia.us • Phone – (515) 242-4801

  26. Federal Assistance

  27. Technical Assistance for Multiple Owner Businesses • meeting & process facilitation • basic cooperative knowledge • organizational development- articles & by-laws • surveys & feasibility studies • market research • business planning • board training • strategic planning

  28. Value-Added Agricultural Product Market Development Grants

  29. The primary objective: Is to help eligible producers of agricultural commodities, agricultural producer groups, farmer and rancher cooperatives, and majority-owned producer-based business ventures develop business plans for viable marketing opportunities and develop strategies to create marketing opportunities in emerging markets.

  30. The Farm Security and Rural Investment Act of 2002 • Farm Bill Highlights • $40 million per year for 6 years • Maximum Grant Amount $500,000 (priority points will be given for applications under the $500,000 max) • Applicants must provide matching non-Federal funds at least equal to the grant. • Expanded eligibility The Farm Security and Rural Investment Act of 2002

  31. Is Your Project Eligible? Three Questions to Ask? 1) Are the funds being used for an eligible purpose? • Planning • Working Capital 2) Is your project an eligible entity? • Independent Producers • Farmer or Rancher Cooperatives • Ag Producer Groups (Commodity Organizations) • Majority Owned Producer Based Businesses (50% or more)

  32. Is Your Project Eligible? • Does your project meet one of the four categories of value-added activities? • Change in the physical state of the product • The production of a agriculture commodity or product in a manner that enhances its value, as demonstrated through a business plan. • The physically segregating of an agricultural commodity or product in a manner that results in the enhancement of the value of that commodity or product. • Any Agriculture commodity or product that is used to produce renewable energy on a farm or ranch. • These Activities Must: • Expands customer base for the product or commodity, and • Result in a greater portion of the revenues derived from the value-added activity that is available to the producer.

  33. Application Process • An original and two copies of the proposal, with all required forms and documentation, must be submitted in one package to the appropriate USDA State Office. • Electronic submission is encouraged! Original Copy Copy

  34. Federal The United States Department of Agriculture has a variety of funding opportunities. www.reeusda.gov www.sare.org/htdocs/sare/. www.rurdev.usda.gov/rbs/ .reeusda.gov/crgam/cfp/community.htm www.fedmoney.com/grants/fn0000.htm State & Private Numerous state funding programs are available www.reeusda.gov/smallfarm/valuedir.htm www.nasda.org/nasda/nasda/member_information/usmap. www.reeusda.gov/1700/statepartners/usa.htm www. fdncenter.org/funders/ http://www.iowacorn.org/pdf/TAGP%20Gudielines.pdf Other Grant Sources

  35. Grant WritingRecommendations • Grants have limited funds and applications are selected using a competitive scoring system. • Address all selection factors  • Provide all application materials  • Submit application early  • Be clear and concise 

  36. FOR MORE INFORMATION • Contact the Rural Development Area Office nearest you • Storm Lake 712-732-1851 • Humboldt 515-332-4411 • New Hampton 641-394-3183 • Tipton 563-886-6006 • Albia 641-932-3031 • Indianola 515-961-5365 • Atlantic 712-243-2107 • Or • Rural Development State Office in Des Moines at 515-284-4714 • www.rurdev.usda.gov

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