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Funding Your AG Business

Author: Colorado Department of Agriculture

Funding Your AG Business

If you’ve been running your own ag business for years and years and years the topic of “funding” may not sound very exciting to you. Even newcomers may not want to think about funding. Despite its name, funding is often not very fun. However, whether you are a long-time expert or you’re just jumping in for the first time, it’s helpful to review some of the fundamentals of funding.

Funding keeps your business going.

It’s hard not to constantly think about your new or growing business. The sense of independence and ability to control your own future is a powerful motivator. And, really, what could go wrong? With your skills and drive, plus a healthy helping of wise decisions, and a bit of good fortune, you will be on your way to achieving your dream. Think of funding as the gas in your tank. Does it really matter what kind of gas you use? The answer is definitely yes, yes it does matter. Choosing the right funding at the right time is one of those decisions that can be crucial to the growth and success of your ag business.

Running a business is stressful, no doubt about it.

Different types of funding come with different levels of, say, stress. Ideally, you’ll want to balance the level of funding stress against your level of business stress. For instance, a new business comes with plenty of business stress. Even if it is exciting, it is still a lot to handle. There are many unknown factors and plenty of  thoughts to keep you up at night: What happens to my crops if it doesn’t rain? What if it rains too much? Will my potential customers actually place orders? Many of your worries are beyond your control at this stage, so if possible, you want your funding choices to be lower stress.

How can you lower your stress when it comes to funding? Let’s look at some strategies.

1. Reduce how much funding you need:

Before you look at where to get funding, consider how you can minimize the need for funding in the first place. This will make it easier to secure funding, because you can potentially ask for less, and you’ll have less to pay back.

  • Can you spend less by getting free or low cost technical assistance? For example, instead of paying someone to help you market your business, check to see if your local Small Business Development Center offers free marketing planning or other services.
  • Can you ask a friend or mentor for advice? Think about someone who can help you avoid common mistakes that could be costly, and who could carry some of the mental burden.
  • Are there other programs that offer support? Explore free, local resources. Maybe your local extension office has an ag program, or the state land-grant university has open opportunities.
  • Can you lease land? Leasing land can be less of a financial burden than buying land. The county in which you want to operate your ag business may lease land, or maybe there is an organization that supports new growers. Find local groups that support agriculture and start asking around. You can also check into organizations such as Guidestone or Quivira Coalition who help connect producers with land. 
  • How about more affordable equipment? If you are mechanically inclined, you might consider used equipment as an alternative to new. If you’re not mechanically inclined, consider leasing key pieces of equipment instead of buying. This could give you a chance to try before you buy, and puts the cost of maintenance and repair on the owner, not you.

2. Research Federal, state and local grants.

Grants are a highly desirable option because it means you do not have to pay the money back. There are often a few hoops to jump through but if you can secure grant funding it’s worth the extra effort.

  • Federal grants. Lately, it feels like the USDA is continually rolling out new grant programs, and continuing its support for established programs. Some of this money flows to state governments to distribute, and some of it comes directly from the USDA. You can find programs that are direct from the USDA on the website. That’s easy, right? Maybe. Finding federal grant opportunities is often easier than applying for them. The challenge with federal grants is that they tend to require a number of formalities, such as DUNS numbers, tax documents, and registration with federal software platforms. In some cases, they’ll require validation such as a feasibility study to qualify for a grant, and the applications are quite involved. Nonetheless, the awards tend to be large and well worth it when won. 
  • State grants. State grants are often funded by the federal government, but distributed by the states. An example is Specialty Crop Block Grants. Because states have flexibility on the application process and project tracking, these grants can be less cumbersome to apply for, although the awards are typically smaller than direct federal grants. The other source of funding for state grants is state legislation. Bills passed in the state legislature authorize the use of funds for various uses. Whether state or federal money, we at the Colorado Department of Agriculture are often responsible for managing agricultural grants. You can find new programs on our website. We also recommend signing up for the newsletter to hear about new grants. It’s not just the CDA, though. Grants related to agriculture can come from the Colorado Department of Education (CDE), Colorado Department of Human Services (CDHS), and the Office of Economic Development and International Trade (OEDIT).
  • Local grants. You might be able to find support right in your community. Private grants are funded by families or local business foundations. Often, they are started by philanthropists who want to help with food security and access or they want to grow community engagement through a shared local garden, classes, internships or other activities. Other grants are offered by nonprofits with a goal of bringing fresh food to food desert areas and educating and inspiring local producers and business owners. Corporate grants are also a possibility. Local businesses that want to give back to the areas where they operate will offer grants to improve community relations and garner positive publicity. Local county grants are available in some counties, although rare. Check out the website for your county to see if they are giving grants in the areas of sustainability, economic development, or small business support. 

3. Negotiate with suppliers.

Is it possible to get short term loans from your suppliers? Yes, it is, and few people think about doing this. Simply asking for more beneficial payment terms is the equivalent of a short term loan. Payment term requests are often granted, especially if you have built trust and you have a good reputation with your suppliers. What are payment terms exactly? It means how long your supplier is giving you to pay for their goods or services. If the terms are NET 30 or NET 60 for example, this means your supplier is giving you a 30 or 60 day loan. Paying a month or two after you receive goods or services gives you more time to collect cash from your own customers so you can pay your obligations. Your cash flow benefits tremendously when you collect money from your customers upon delivery and pay your bills 30-60 days after delivery. With cash-in-hand it can be easy to forget that you owe some of it to your suppliers. Be sure to make good on those commitments by tracking them carefully.

4. Explore different loan types.

Let’s talk about types of loans and main considerations. Here are the basic loan types:

  • Secured loans. A loan that is backed by something of value that you own (collateral). If you do not pay the loan under the agreed terms, the bank has the right to use your collateral to repay the debt. In some cases, the item you are purchasing may serve as the collateral. For instance, if you are buying a tractor with your loan, the tractor will become the property of the bank if the loan is not repaid. Fun fact – this is why some lenders, seemingly irrationally, will require you to buy a new tractor instead of a used one. The bank knows how to value your new tractor and how much it can be sold for. However, as with any used piece of equipment, the value of a used tractor is more difficult to assess and recover.
  • Unsecured loans. An unsecured loan does not require any form of collateral for you to qualify. For instance a credit card is an unsecured loan (line of credit). 
  • Term Loans. Term loans can be secured or unsecured and are required to be paid at regular intervals over a set period of time. Once approved for a term loan, lenders provide businesses with capital in a lump sum amount. Businesses normally accrue these debts in order to purchase fixed assets including equipment or investing in a building. Regardless of loan type, standard banking policy is to match the terms (length of time to payback) to the life of the asset or expense you are purchasing. Terms for a loan to purchase land typically range between 20 and 40 years, depending on the specific program. Terms for a loan to purchase a piece of equipment that has a useful life of ten years will typically be ten years. 
  • Working Capital Loan. Working capital loans can be used to help finance your daily operations, such as making payroll, paying invoices, or buying equipment. One of the main differences between a working capital loan and a term loan is that working capital loans can have terms as short as 12 months or up to five years. The capital can only be spent on the things you said you were going to purchase. In most cases, the bank will hold the funds and release them as the specified purchases are made. The benefit to you is that you only pay interest on the amount of funds you have used (interest is calculated on avg. daily balance).
  • Revolving Line of Credit. Considered a subset of working capital loans, revolving lines of credit also have short terms. Unlike working capital term loans, lines of credit have set borrowing limits that can be used at any time, paid back, and borrowed again. Most lines of credit are reviewed annually and require you to pay down the balance to zero at least once during that time. 

A good plan to pay back your loan is critical to stress-reduced success.

Remember what it felt like as a kid when you had to borrow lunch money from a friend? Typically, that kid would relentlessly remind you until you paid them back. Debt can be like that. It’s always there in the back of your mind, or in your mailbox, or email, looming over you like a dark cloud. Debt, however, doesn’t have to feel like a constant burden, not if you have a good plan for paying it back (hoping you can pay it back is not a plan, you need an actual plan).

Whether grant money, donated money, or loaned money, the objective is the same: thoughtfully and purposefully invest your money in a way that generates additional revenue. Investments can include a broad range of spending including equipment, buildings, labor, inputs, livestock, or intellectual property. Any of these can be used to create value that your customers will recognize and pay you for. If you know how the investments will increase revenue, and stick to the plan, you can have a good degree of confidence that the increased revenue will be there to pay the debt. 

Those who are good at managing debt often know the trends in their business, have experience that minimizes the challenges of production, and have learned how to predict future demand with a fair degree of accuracy. They also adhere to smart financial practices such as maintaining reserves to protect against unexpected events, keeping due dates in mind and staying on top of monthly payments, communicating regularly with their bankers (this builds trust, trust builds support), and prioritizing loan payments. 

We hope this puts some fun into your funding journey.

Securing funding is a necessary part of running most any business. For an ag business, in particular, it is a critical step for not just operations, but also for increasing revenue. The bright side is, once you do get your funding, it can be a cause for celebration! Take your time and do your homework. If you first reduce the amount you need, and then look for funding opportunities that will benefit you the most, and you have a realistic plan to pay back your loan, you’ll find there are quite a few avenues to take that could really provide the security and “gas in the tank” you need. And it may be more fun than you think.

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