I recently read an article on CNNMoney.com about some organic farmers who wanted to expand their farming business, but it meant taking on bank debt. Courtney Lowery Cowgill and her husband had a small organic farm specializing in vegetables, turkeys and ancient heritage grains in Conrad, Montana.
They started the farm using borrowed funds from friends and family. It was a three year loan at a very low rate of 3%. Different than most farming businesses, the Cowgill’s were just working leased land as their farm without living there. Their business model used a subscriber base, where the participants paid in advance for a portion of the crop. Although they were doing well, they wanted to expand which meant they needed capital to grow their business. They wanted to buy equipment, land, live on the farm and increase the grain business. They decided they needed more capital which meant a loan from the bank.
Going to the bank, no matter how successful you are is daunting. Bankers ask a lot of questions and want a business plan. The Cowgills were scared, but they had a successful business. Now they are asking for a loan to make it a full blown business. Farms have history of failing under the burden of debt particularly in hard economic times. Farming is a risky business anyway because crops can fail, weather can wipe you out, disease can destroy animals or crops, and market conditions can put you out of business too. One year you’re looking through a selection of John Deere tractors to buy and the next you’re trying to eke out a living. Why would anyone want to enter this kind of business? I am sure the bankers asked many more questions.
What would you do? It was the Cowgill’s dream to take this fledgling business and turn it into a real business. They were scared of the debt, but needed it to expand! Anything less, they might as well sell it off, because without the expansion the business cannot grow. They had to face realty, if they were serious farmers they needed to expand. Have you ever wanted to do something, but afraid to do it? Many people go through these decisions, the successful ones were afraid, but overcame that fear.
The Cowgill’s had to come up with a business plan. What is a business plan? It is a road map for the business over a period of time to show the owners, bankers or investors how the company will be successful. What is in a business plan? Business Plans usually include these eight (8) steps: Most plans start with the company name and a description of products or services they are selling. A vision statement will describe in broad terms what the company will look like in five years. Next is a mission statement which will define the business activities and how the business distinguishes itself. Goals and objectives would define what will be achieved in the business. Strengths, weaknesses, opportunities threats (SWOT) analyze your business, industry, marketplace, competition and technology that could affect your success. Strategic action plan is describing your strategy for sales and marketing. Financial plan would include a budget, cash flow statement, five year projection and financial statement. Last, measuring and evaluating your goals. You will monitor your performance compared to your budget in the business plan on a regular basis for the bank or investors.
Working through your business plan will give you a realistic view, if your business will ultimately be successful or not. That and the bankers or investors will make sure that the business is viable. If you need outside capital to start or expand a business, you will need a business plan. This is scary, but waiting has a cost associated with it too. Are you willing to give up your dream? There are alternatives to getting a bank loan or any loan; you can ask investors to buy into your company. You still need your business plan, but you will give up some ownership in this option. This option has no debt, but you end up dividing the profits. How much would you give up? That is negotiable, and depends on risk and valuation. Either way it will cost you something, but you have a chance to achieve your dream. What would you do?
I understand the Cowgill’s dilemma, but, because part of my dream life is to stay out of debt, borrowing money is not a consideration. I suppose, if I was in their shoes, I would live a sacrificial lifestyle and pump all the profits I could back into the business, growing it slowly without debt.
As a contemporary, I understand your reluctance to go into debt at this stage of your life. I agree, I wouldn’t do it either.
You need the return to justify the debt and the added risk. Given how risky this business can be, I’m not sure if I would finance off of debt. I might finance out of retained earnings instead, but it comes down to each person’s risk tolerance.
Risk and return is certainly part of it, but would you take on debt to have your dream?
I’m with Joe. While i empathize with their dilemma, I would be unwilling to assume the debt in order to expand the business. I would have to find another way and go more slowly.
What if there weren’t? Do you give up the dream? I think what is missing from my story is the feeling of success and staring at the possibility of more success. It is the old risk and reward syndrome!
I agree with Kevin, Roshawn, and Joe. Especially wrt farming-very risky business. Since I view even the smallest amount of gardening as a chore, I definitely wouldn’t even consider this idea 🙂
I don’t blame you. Entrepreneurs view debt and risk differently.
Did they get the loan?
I would never consider any business (besides my 10 dollar a month blog) without writing my own business plan. Sure, you can hire someone to do it, but I would want to do my own research and see if the market is really there.
I would not go in to debt to finance a farm. However, if I had a unique recipe or something and dreamed of opening a cafe, I would consider it if the market was there. (That is just an example.) Especially if borrowing rates were still really low.
I don’t know. Your example of a cafe is curious, since restaurants have one of the highest failure rates. I don’t know anything about organic farming, but it probably is risky.
Interesting dilemma. I wonder why the bank and FSA are first choices, and not the investor network that got them started.
Interesting comment, I do not know! Perhaps not enough capital?
I think they should focus on trying to grow organically and cash-flowing the business. Equipment and grain? These sound like items you should be able to buy without taking on additional debt. Taking money from the banks at this point is just going to add more restrictions to their business. Debt from the bank will increase the risk of the business substantially. However, I do understand that to grow faster, they probably need something like this. As much as debt doesn’t belong in personal finances, I think it can still be used as leverage when a business is in its early growth stages.
Grow organically, no pun intended? HaHa! Unfortunately, the equipment is expensive and they want to buy a farm. The combination requires more capital then they can generate internally. The real issue is do you go into debt for your dream? I am just raising the question, although believing in your success is a big part of entrepreneurship!
I agree! In fact that is why I stress analyzing your expenses first. The budget is there to help you reach your overall financial goals.
Interesting post. But farming is as much about the intangible as it is the tangible. Things like cash flow and balance sheets. About your dreams — and when to take on debt to finance them. It’s true that each little decision — each seed put in the ground and each new customer signed up — marked another small commitment.
I agree there are a lot of intangibles! For me, if you are really committed to your dream, you should go for it. If it means some debt and it makes sense financially, why not. There seems to be another prevailing thought I keep hearing no debt no how. I am conservative when it come s to money and I think it has to make sense to go into debt. To just stay away from debt because it is debt seems wrong.
I think they should go for it. What’s the worse that can happen? They’ll just fold and ends up with nothing. Hopefully then can form an LLC or something to separate their business from personal finance.
I assume the land and heavy equipment is the main cost that they need to finance.
Presuming the numbers come together and it makes sense, I agree. Debt should not scare someone away from their dream.