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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.

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Creative financing growing your organic business l.jpg

Creative financing: growing your organic business

Tom Manley

Canada’s Organic Farm Supply Business

Presented at ACORN 2008

Creative financing l.jpg
Creative Financing

  • Define a sustainable business.

  • Enumerate your capital needs.

  • Describe sources of capital, credit, grants.

  • Discuss taxes and incorporation.

Presented at ACORN 2008

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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Sources of capital

  • Your personal capital

  • Commercial banks


  • Agricultural Adaptation Council

  • Regional economic development corporations

  • Private investors

Presented at ACORN 2008

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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

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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

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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

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  • 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

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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

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  • 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

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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

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  • 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

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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

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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

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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

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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