Though raising capital in today’s financial landscape is no easy task for farmers and producers, there are several strategies to consider. One strategy centres on innovation. Business owners have made investing in innovation a priority, and agriculture producers have been among the most active, investing in advanced machinery and equipment that provides faster processing times. Understanding the need for assistance, various governmental agencies have earmarked substantial dollars to aid growers in making innovative investments in their operations, including non-repayable grants and noninterest loans. Most of these loans are structured with deferred repayment terms for one year and designed to assist with managing cash flow. In today’s financial landscape, businesses who are able to tap into this kind of financing have a significant advantage.
Raising Capital in Agriculture – Buyer Beware
The forms of security sought after by lenders are fairly common in the current marketplace. These typically include corporate and personal guarantees and general security agreements over some or all assets of the business. However, the inclusion or exclusion of the personal guarantee requirement, and the dollar value of the guarantee, are often areas of review. A careful review by a lawyer and accountant is a worthwhile practice before signing off. Often, security clauses can be altered or removed altogether through negotiation.
Raising Capital in Agriculture – Shop Around
Whether looking to expand, refinance or acquire a farming business, it’s common to look for financing from an existing lender or bank. The commercial lending marketplace is extremely competitive and lenders are constantly looking for good investments to place their capital. A customer is well served to seek the best deal from three or four lenders. The benefit is three-fold: 1) Going to multiple lenders ensures the best rate as healthy competition typically results in a better bargaining position. 2) Competition promotes greater urgency and a faster close of the transaction. 3) Some lenders are willing to invest more than others.
Raising Capital in Agriculture – Think Outside the Box
Many entrepreneurs have tapped into new and interesting ways to raise capital for start-ups, expansion and various projects. Ventures such as crowdfunding are currently being used to help raise capital for farm start-ups and expansions. The concept of crowdfunding involves the funding of a goal or project through leveraging small contributions from many people. It is widely used in support of charitable causes and disaster relief, however it also lends itself well to business uses. Whether the funding provides an investor reward (financial or non-financial) or donative, the possibilities are endless in attracting investors.
Raising Capital in Agriculture – Five Common Pitfalls to Avoid
There are a number of factors and pitfalls that should be considered before starting to invest and commit dollars into your agricultural business venture.
1) Applying for a loan costs money – banks charge a fee to process a loan which can run from a few hundred to a few thousand dollars depending on the size of the loan. Some lenders have an upfront, non-refundable fee which is owed even if the loan is not obtained.
2) Most lenders require a significant amount of due diligence prior to loan approval. This typically involves having a set of pro-forma financial projections prepared, producing appraisals, providing personal net worth statements, etc. All of this requires upfront investment from the borrowers before the loan is processed.
3) Very few loans are approved locally. Most banks send loans to their credit department to make the final decision. Generally, this structure results in longer processing times for loans and business owners have to be prepared to wait it out.
4) Lenders have a number of different metrics they use to assess credit risk and decide which businesses make good candidates for a loan. The most important criteria used by lenders is the value of the underlying assets and how much cash flow the business generates or EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization). Lenders can loan up to a percentage of the assets they are funding; however, they also evaluate the level of EBITDA generated by the business to determine if the business can service the debt.
5) Other benchmarks exist on an industry by industry basis which may be unknown to many. For example, some commercial lenders are operating with restrictive guidelines when lending to dairy farms. Producers that are leveraged above the lenders’ benchmark are at high risk for meeting their debt service obligations in the view of lender. As a result, anyone looking to purchase an existing dairy farm will require a significant amount of equity in order to meet the demands of the bank to partner on the deal.