Maryland Agricultural and Resource-Based Industry Development Corporation

1. Maryland Agricultural and Resource-Based Industry Development Corporation 2013 MD Farmers Market Conference Stephen McHenry, Executive Director www.marbidco.org

2. MARBIDCO A nimble and collaborative quasi-public service provider focused exclusively on enhancing the viability and profitability of ag and resource-based business and industry.

3. Top Ag/RBI Business Development Concerns Access to affordable credit and capital Appropriate information/referral/business planning Help for young/beginning/ diversifying farmers Loss of rural land

4. MARBIDCO Board MD Dept. of Ag Dept. of Natural Resources Dept. of Business & Economic Development MD Cooperative Extension MD Food Center Authority Rural MD Council Governor appoints 11 members from: dairy, forest, equine, poultry and seafood industries; and experts in food processing, commercial finance and rural economic development.

5. Other Partners Commercial Banks & Farm Credit System USDA (and other Federal Agencies) Farm and commodity groups Rural industry associations Rural regional development councils Local economic development offices MD Ag Land Preservation Foundation Foundations and local land trusts

6. Key MARBIDCO Roles • Highly specialized rural business investor (as a lender and a grants-maker) • Among other things, our focus includes: - Young and Beginning Farmers - Value Added Processing • Financial intermediary (for core rural business development, specialized high risk lending, land preservation conduit financing, etc.) • “Silo connector” (with public/privaterural business service providers)

7. In Our First 5 Years….. Since 2007, MARBIDCO has made investments in 220 agricultural and rural businesses totaling about $17.6 million. Helped 65 young or beginning farmers. Helped to finance 86 farm value added processing projects. Helped MALPF to facilitate 2 farmland easement purchases using installment purchase agreements

8. MARBIDCO's programming fall into three broad categories • Core Rural (and urban-edge) Business Development– several loan and grant financing programs that are funded as a result of the Agricultural Stewardship Act of 2006 • Rural Land Preservation Facilitation– programs that are funded from "special funds", or that are offered with others (conduit finance) • Higher Risk or Micro-Credit Lending – loan programs that are funded by partnering organizations for targeted purposes (e.g., energy efficiency and shellfish aquaculture)

9. Introduction to Rural Business Lending

10. Distinctions between consumer lending and commercial lending: 1 2 The level of credit risk is reflected in the interest rates that lenders charge: Secured loans (car & home) – interest rate is lower Unsecured loans (credit cards) – interest rate higher Underwriting consumers loans involves a less sophisticated review and analysis than business lending does. Consumer lending – usually only these factors are considered: Character – as reflected in a credit score Cash Flow – historical income and debt Collateral – for auto and mortgage loans 3

11. Commercial lending considerations: 1 2 Again, the level of credit risk is reflected in the interest rates that lenders charge: Secured loans (for real estate and equipment purchases) – the interest rate tends to be lower Unsecured loans (only small loans for operating expenses w/ established borrowers) – rates higher? Underwriting business loans involves a more sophisticated review and analysis than consumer lending does. Small businesses, and especially new business ventures, are often higher risk enterprises for banks to lend to because of the higher probability of business failure. 3

12. Commercial Lending requires an analysis of “The 5 Cs of Credit” 2 – Capacity 1 - Character 3 – Capital 4 – Collateral 5 - Conditions

13. Character Is Reflected in a Credit Score and an AgScore • Character refers to the financial history of a borrower typically demonstrated by a credit score (also called a FICO score). When lenders examine a credit report they are checking to see if a customer (an individual) has a responsible credit record. MARBIDCO also uses FICO score information combined with certain borrower financial information to determine an “AgScore”.

14. Capacity Business Capability and Positive Cash Flow • Capacity refers to the ability of the business to generate sufficient revenues in order to pay back the loan. Does the borrower have prior experience or a track record, and is there a market for the product or service to be financed? Lenders are particularly interested in periodic income and loan obligations as well as current operating costs. Showing a monthly/quarter operating budget to a lender will help demonstrate what is feasible to pay each month/quarter. A business that can show a positive cash flow (where income exceeds expenses) for a sustained period of time has a good chance of getting a business loan. [If there is no capacity to make the loan payments, the loan should not be made even if the loan is fully collateralized.]

15. Capital Previous Investment & Project Equity Contribution • Capital refers to the capital assets of the business, and is often compared relative to debt obligations to determine financial solvency. Capital assets might include machinery and equipment, as well as product inventory (as reflected in a balance sheet). From a project financing perspective, capital is sometimes equated with “equity”, or a cash or other tangible contribution to a particular business activity that is proposed to be financed. A direct financial investment to be made by a borrower demonstrates a financial commitment to the lender so the lender does not feel that they are taking all the financial risk.

16. Collateral Security More Than Just A Personal Guarantee • Collateral is the asset(s) a business owner pledges to secure a loan. In addition to having good credit, a proven ability to make money (or a least a good plan), and business assets, banks will often require an owner to pledge his or her own personal assets as security for the loan. Banks require collateral because if an owner didn't have to put up any personal assets, he or she might just walk away from a business failure. Having collateral at risk makes the business owner more likely to work to keep the business going. Real estate is the most preferred form of collateral, followed by certain financial securities and equipment that is easily recovered in the event of a loan default.

17. Conditions The Economic and Regulatory Environment • Conditions refer to the larger economic and regulatory environment that an existing or new business or business expansion activity will operate within. Factors relating to marketplace demand and industry trends would also come into play here. Any lender that makes loans without consideration of the economy and conditions relative to the applicant's business may end up taking an unnecessary risk. Cyclical businesses in particular are difficult to finance due to the irregularity of cash flow. Cyclical businesses often are seasonal, and should the business depend on certain weather conditions, any adverse deviation from normal weather conditions could seriously jeopardize the businesses ability to service debt. Since cyclical businesses play an important role in many rural communities, caution can be exercised in not rejecting a loan applicant due to unpredictable receivables, but rather structuring a loan that recognizes the variables and therefore the terms and conditions of the loan can be flexible for these situations.

18. A word about two lending philosophies – A philosophy of asset-based lending uses a less sophisticated analysis of the 5 C’s and focuses more on just the adequacy of the collateral being available in the event of a loan default [and as such would tend to use a lower loan-to-value ratio and charge a higher rate of interest for the credit] Cash Flow Lending: A philosophy of cash flow lending incorporates a more sophisticated analysis of the 5 C’s with a particular emphasis on the pro forma cash flow analysis. The availability of collateral is still important [but one can expect to see somewhat higher LTV ratios and lower interest rates potentially] Asset-Based Lending:

19. So, what are the first things that a farm borrower needs to apply for a loan? Including background on the existing business (if applicable) and the experience of the owner, as well as many details on how the business expects to operate going forward, what the market is that is going to be served and the product sales strategy. A Pro Forma Cash Flow Analysis: Which would include not only a historical look at the revenues and expenses of an existing business enterprise (if applicable), but a forward-looking analysis of all business revenues and expenses for the next 3 to 5 years (on a period-by-period basis). A Written Business Plan:

20. MARBIDCO Loan Programs Maryland Resource-Based Industry Financing Fund Loan (MRBIFF) Rural Business Equipment & Working Capital Loan FD Maryland Vineyard Planting Loan Fund Forestry Equipment and Working Capital Loan Fund Rural Business Energy Efficiency Improvement Loan F Maryland Shellfish Aquaculture Financing Fund Maryland Remote Setting Aquaculture Financing Fund Agricultural Cooperatives Equity Investment Fund NOTE: All loans reviewed and approved by a loan review committee.

21. Maryland Resource-Based Industry Financing Loan Fund • Maximum Loan Amount - $200,000 ($400,000 for land purchase). • Financial commitment: • A commercial lender and/or a public instrumentality must have an equal commitment in the project. • MARBIDCO will accept a junior lien position in most situations. Offers low-interest (3% APR initially) loans for the purchase of land and capital equipment.

22. Benefits to using a MARBIDCO “MRBIFF” loan Complements the financial services offered by commercial lenders by helping to make rural business “gap” financing both available and affordable. Flexible loan terms to match and enhance commercial lender offerings.

23. MARBIDCO Grant Programs Grant program offerings in 2013: Local Government Ag/RBI Project Cost Share Program Maryland Value Added Producer Grants (Capital Assets Option & USDA Option??)

24. Please visit us on the web…… www.marbidco.org