Finding Finance for Your Organic Operation Craig Chase Iowa State University Extension Rick Burras Viking State Bank

Today’s Session Description How to approach a lender about borrowing money. In particular: What information to bring. How to request funds. Questions to ask. How to structure the loan. How much collateral is enough.

Presenters’ Note  We would prefer to keep this presentation as informal as possible: Ask questions when you have them. Discussion is welcomed and if you have experiences you would like to share, please do.  Before we start, we would like to know who you are and what questions you had when you walked in…

Different Starting Point Before you approach a lender, you need to: 1.Know how to speak “finance”. 2.Understand lender expectations. 3.Consider what expectations you as a borrower have toward your lender.

Speaking “Finance”  To some this is truly a foreign language.  In order to be able to talk about your loan request, loan structure, etc. you need to be able to understand common terms used by lenders (or speak “finance”).  We will start by going through an exercise…

The Financial Match Game (Take a couple of minutes to do)

Financial Match Game - Terms 1. Net worth statement 2. Liquidity 3. Assets 4. Financial efficiency 5. Net Income 6. Solvency 7. Liabilities 8. Income statement 9. Cash operating expenses 10. Net Worth 11. Repayment capacity 12. Statement of cash flow

Financial Match Game - Definitions A. The degree to which the business is able to pay off all debts with assets and net worth. B. The ability of a business to meet its financial obligations over the next 12 months. C. The amount of dollars owed by the business. D. The cash expenses incurred to operate the business. E. The difference between gross revenue and operating expenses. F. Statement that summarizes the sources and uses of cash. G. Statement that illustrates the business’s assets, liabilities, and equity at a single point in time. H. The difference between total assets and total liabilities. Also referred to as equity. I. Indicates what percentage of gross revenue goes toward interest, operating, and depreciation expense, and net income. J. Measures the degree to which profits can be used to repay liabilities. K. Statement that summarizes revenues and expenses for the business over a specific time period. L. Resources owned or controlled by the business.

The Financial Match Game Net worth sheet(G) Liquidity(B) Assets(L) Financial efficiency(I) Net income(E) Solvency(A)

The Financial Match Game Liabilities(C) Income statement(K) Cash operating expenses(D) Net worth(H) Repayment capacity(J) Statement of cash flow(F)

Financial Plans Why did we do the financial match game? Bottom Line… It is extremely important for business owners to understand financial statements and terms in order to talk “finance” with lenders and potential investors.

Understanding Lender Expectations

The 5 Cs of Credit 1.Capacity – the ability of the business to pay debts and expenses and be profitable. 2.Capital – money or equity the business owners or investors are putting into the business. 3.Collateral – the value of the assets that secure the loan.

The 5 Cs of Credit 4.Conditions – the economy, industry trends, or other factors that will affect the ability of the business to make a profit. 5.Character – the education, background experience, and references that indicate the personal qualities and qualifications of the borrower.

Be Ready to Answer Questions Questions the lender will ask: Can the business repay the loan (cash flow)? Can the loan be repaid if the business fails (collateral)? Does the business collect its bills? Does the business control its inventory? Does the business pay its bills?

Questions Questions the lender will ask (continued): Are the officers committed to the business? Does the business have a profitable operating history? Does the business match its sources and uses of funds? Are sales growing?

Questions Questions the lender will ask (continued): Does the business control expenses? Are profits increasing as a percentage of sales? Is there any discretionary cash flow? What is the future of the industry? Who is the competition and what are their strengths and weaknesses?

Selling Your Idea  In addition to answering questions, you can help sell your idea by doing the following: Review your balance sheet and make sure debt levels and asset valuations are reasonable. Develop marketing and risk management plans – it’s not “if” your business will deviate from your plan, it’s “when”. Marketing and risk management plans help define what you will do when things don’t go according to plan.

Selling Your Idea Develop business goals, objectives, and integrate them into a business plan. Identify a management team to help you with the areas that are not your strengths (e.g., tax accountant, attorney,…). Other ideas…

Information to be Requested  Current balance sheet with asset and liabilities updated within 30-days plus the previous two years balance sheets.  3 years of tax returns-not only schedule F but the full return.  Business plan if available.

Credit Scoring  Example 1… (see handout)  Workshop Exercises… You have two examples of potential borrower’s ratings (see handout). Review the credit score sheets and indicate whether this business is a good risk or not. Also what additional information or questions would you have for the borrower. (take a couple of minutes to review)

Consider Your Expectations What do you want from your lender (in addition to money)?

Before Asking for a Loan  Ask the prospective loan officer to meet (preferable at your place of business) to discuss your ideas. This can be done at the beginning stages of the planning process.  The loan officer may have ideas and will let you know what information will be needed to proceed.  If you don’t feel comfortable with the answers, talk to another loan officer…

Questions You Should Consider Asking 1.How many loans like mine do you have? 2.How important are loans like mine to your bank? 3.Do you see an increase in lending requests for organic operations? What question(s) have you asked or would you ask?

Other Thoughts…  When meeting with the lender, be on time and professional.  Answer all questions positively. Back up your answers.  If your business is unique, ask the lender to visit your business to show how you will conduct the business.

Other Thoughts…  Follow-up the meeting with a thank you letter and/or phone call.  Lenders don’t like surprises. Keep them informed particularly when things may be going off-plan.  Personal credit history is important; protect it.

Other Thoughts…  If the loan is rejected, ask why and what alternatives are available to you (be positive).  Other thoughts or questions you should ask the prospective lender?

Questions….. Any questions or comments on any part of the presentation or discussion? Thank You for This Opportunity! Craig A. ChaseRick Burras Farm Management Field SpecialistEVP, Viking State Bank & Trust th Avenue SW321 West Water Street Tripoli, IA Decorah, Iowa (319)