Your Approach
When writing your plan and developing your ideas, remember two important rules:

1. Speak their (the lenders’) language!
2. Develop a business plan that puts the plan/dream on paper:

• goals
• defined expertise
• mission statement
• operating plans
• risk elements and plans to deal with/mitigate them
• suggestions for addressing risk elements

Risk Assessment
One of the primary reasons for the preplanning work is to consider various factors that can impact your project. Once you decide which factors are important to the success of your venture, then you must decide what to do about them to minimize risk. Minimization of risk is one of the key reasons for all this planning activity and for writing the business plan.

Here, we have outlined a variety of factors associated with getting your business started – all or some of them will apply. All are considerations that carry some risk. As you read down the list, ask yourself these critical questions.

1. Based on what I know now, which risks must I consider as part of our business?
2. If the risks may be factors, who should do the investigative work to check further?
3. How can we minimize risk in this venture?
4. How much financial risk can the initial investors handle? That is, how much money can they afford to lose?

Construction

• Cost overruns
• Timing of completion
• Correct building and equipment design
• Risk of noncompletion
• Proper payment of subs/potential mechanics liens
• Management of existing operation
• Due diligence on construction contractor
• Bonding of contractor
• Fixed cost contract
• Proper construction monitoring
• Planning discipline
• Depth of management

Management

• Planning
• Key person
• Management expertise
• Personnel management
• Production information
• Preparation of business plan
• Key person life insurance
• Consultants (nutritionist, veterinarian, financial, human resource, peer group data)

Production
These relate to what type of supplier quality management system will be in place. The issue is assuring a quality animal delivered to you for processing.

• Input (feed, forage, grain); price variability
• Effect of climate (extremes)
• Replacement animals
• Herd health plan
• Degree of formality to marketing plan (open market vs. contract)
• Building/system design
• Procurement plan/discipline
• Monitoring of production/quality (See the chapter on quality in this manual for a discussion of quality systems.)

Environmental
No one, and most of all, your banker, wants your project to be the lead article in the local paper because of environmental risks.

• Costs – fully include environmental considerations
• Permitting requirements
• Manure management plan, easements
• Contingency fund
• Degree of adaptability to increased regulation
• Utilization of consultants
• Building plans
• Long-term easements
• Compliance plus (ability to adapt in the future to greater regulatory burden)

Financial
The input cost model will assist you in putting these factors into numbers so you can quantify your risk.

• Interest rates
• Loan structure
• Margin for error (cash reserve)
• Attention to yield curve, interest rate cycle
• Fixed or adjustable rates
• Proper working capital
• Outside resources

Loan and other terms

• Livestock – 5-year, monthly payment loans with revolving feature, driven by a borrowing base
• Equipment – 7-10 years, monthly payment
• Facility – 10-15 years, monthly payment
• Interest only first 6-12 months
• Line of credit – typically minimal amount unless significant crop operation is involved
• Loan to value at 75 percent of cost
• Secured by mortgage on real estate facilities
• May capitalize start-up (first year) operating losses within facility loan
• Rates are competitive (variable, adjustable, fixed)

Cash Management
Cash flow and cash management are very critical in the early stages of a new business.  Proper cash management to maintain cash flow can be improved by working closely with a bank to establish cash management functions.

• Capture of sales proceeds electronically or via lock box
• Loan/investment sweep account to keep funds fully invested
• Payroll accounts and direct deposit of payroll

Employee Benefits
Your business may not have any employees at the start. However, as business increases and you are trying to run a farm operation plus a processing/wholesale operation, the need for employees may quickly arise.

• Group health insurance
• Payroll processing and reporting
• “Bank at Work” program for employees
• Retirement plans for employees (401K, defined benefit)
• Retirement plans for owners (SEP, Keogh, SIMPL plans)

 

Resource
Vincent, Tom, President, Agri-Division, Brenton Banks