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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

Creative financing: growing your organic business

Tom Manley

Canada’s Organic Farm Supply Business

Presented at ACORN 2008

creative financing
Creative Financing
  • Define a sustainable business.
  • Enumerate your capital needs.
  • Describe sources of capital, credit, grants.
  • Discuss taxes and incorporation.

Presented at ACORN 2008

homestead organics
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

why me
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

why do most businesses fail
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

a sustainable business
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

what is profit
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

capital requirements
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

fixed assets
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

working capital
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

to reduce working capital
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

customers could be your enemy
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

there is help with ar
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

capital for business start up
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

capital for debt servicing
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

financial ratios
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

sources of capital
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

your personal capital
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

commercial banks
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

government lenders
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

slide21
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

junk mail
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

leasing
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

economic devt corps
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

grants
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

private capital
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

other shareholders
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

to incorporate or not
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

reducing taxes
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

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