creative financing: growing your organic business
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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. - PowerPoint PPT PresentationTRANSCRIPT
Presented at ACORN 2008 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.
Employees•Wages, treatment
Owners•Profits, pay, ROI
Customers•Products, services, prices and value
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.