Here’s some background on a project I’ll be assisting with over the next year – Patty
It’s been tough all over for small businesses trying to get loans from recession-wary banks. But the reaction that Bruce Kirk, a 25-year veteran of the organic food industry, experienced over the past year speaks to a much deeper chasm between lenders and the new field of farmers and other entrepreneurs in the growing business of local food.
It’s the same issue whether the loan applicant is a family farm profitably selling salad greens at farmers markets and to nearby schools and colleges, or a new venture like Kirk’s, aimed at bridging the regional distribution gap between farmers and food buyers.
“Bankers don’t know how to loan into a market if it’s in a paradigm shift and they are unfamiliar with it from a business model standpoint,” Kirk said, after fuming for a while first about the struggle he and partners have had.
Nine banks turned their business away despite 30 percent equity in the startup and a 90 percent federal loan guarantee, on top of an exhaustive business plan, impressive management credentials, and real-time evidence of target market uptake.
The company, Organic Renaissance, is a high-tech local food startup in New England that operates like a cross between E-Bay and FedEx. It provides an Internet platform for producers of local, natural, and organic foods to market their wares and for buyers to order the food directly. It then provides the critical component of on-the-ground delivery of those orders, complete with credit card scanning at each end to complete the farmer-to-buyer deals.
“We made it all the way to the bank chairman once,” Kirk said. “But he just couldn’t understand that we don’t take possession of products and have inventory like the old distribution model. He couldn’t get past that.”
Time for an intervention
The fact is that many commercially viable farms are getting smaller, not larger. The number of U.S. farms smaller than 49 acres grew 15 percent from 1997 through 2007, and they increased 4 percent as a portion of total farms.
Those making money are often selling a diverse range of products to a diverse range of customers, not just one or two large-volume commodities, like corn and soybeans. Growing alongside are agribusiness partners like Organic Renaissance that also defy conventional financial formulas.
The greatest need in this emerging market, according to an initiative focused on financing America’s new farm entrepreneurs, is some kind of translation device — a way for smaller, diverse, beginning farmers, in particular, to put their business models and market opportunities into terms that lenders can deal with.
“Financial institutions have to have good information about the sector they’re lending into,” said Susan Cocciarelli of the C.S. Mott Group for Sustainable Food Systems at Michigan State University.
She chairs the initiative, Financing Farming in the U.S., along with Dorothy Suput, executive director of The Carrot Project, a nonprofit in New England that tries to bridge the financing chasm that new-generation farmers face.
“What we’re trying to do is help lenders and the new generation of farmers communicate,” Cocciarelli said.New tool: Farm credit scorecard
After a year of research, Financing Farming in the U.S. has come up with the start of a farmer-lender translation device. It’s the beginning of a small business credit scoring system for farms, said banker Denise Dukette, who joined the working group while she was associate director of the Western Massachusetts Enterprise Fund.
She’s seen how much small business credit scoring, which is modeled on consumer credit scoring, has since the 1990s changed the way bankers approach the diverse world of small businesses, from car dealerships to convenience stores.
“It has given banks a coherent way of understanding risk in small business lending that is otherwise hard to quantify,” Dukette said.
Financing Farming in the U.S. has drafted a scorecard tool that could help financial institutions enter the new farm sector by building mutual financial understanding between lenders and the new generation of smaller, diverse food and farm entrepreneurs.
The pilot scorecard sets out the types of risk mitigation strategies that successful farms employ for a range of challenges, from production risks like weather to legal risks like food safety. The scorecard then relates these risk mitigation strategies to five standard risk measurements that lenders use to qualify loans (liquidity, solvency, profitability, repayment capacity, and financial efficiency).
The plan now is to put this initial farm credit scorecard through a proof-of-concept drill. Cocciarelli, Suput, and their national team of lenders and technical assistance providers are inviting financial institutions to help test and further develop the scorecard in partnership with their own local farm development partners.
Chief among their prospects are the nation’s community development financial institutions (CDFIs). These nonprofit, mission-based lenders — from credit unions to micro-loan funds — already take pains to help entrepreneurs put together credit-worthy business plans.
In the new farm sector, such technical assistance and coordination of resources is a key component of building capacity on the borrower side, familiarity on the lender side, and systematic engagement on the community side, said Gray Harris of Coastal Enterprises, a statewide CDFI in Maine.
She explains: “It takes the concerted effort of an organization to coordinate the network of resources needed to support these new agri-enterprises.”
The results are well worth it, she said. “We see greater management and financial capacity among farmers, and greater comfort among lenders, which paves the way for successful financing.”
Lending in the new farm sector also calls for a broader view of community and economic development beyond how many jobs an enterprise will generate, Gray said. “What we’re looking at, as a metric in a way, is how many people we feed by supporting these operations, and how we will continue feeding ourselves into the future.”
Getting to “yes” for credit-worthy farms
With an aging farm population, it is the new crop of capable and passionate beginning farmers — often coming from city and ethnic backgrounds — that communities must cultivate for future food security, as well as the land stewardship and local commerce that farmers also provide.
Yet lenders are right to be wary, said Mark Cannella, who heads up the Success on Farms enterprise development program at the Intervale Center, an agricultural business incubator in Burlington, Vermont.
The farming sector is well known as high risk, with crops that pay only long after they’re planted and net profits that are exceedingly vulnerable to the great uncontrollable force of weather. Startup operations are also challenging, particularly in an emerging market.
A lot of the farm loan applications bankers receive may not be ready for investment, he said. “But how can we make sure that a farm with a business model that works, and strong business management capacity can communicate with lenders and get a fair shake in a loan?”
He’s talking about operations like Mighty Food Farm in Pownal, Vermont.
Owners Chuck Currie and Lisa MacDougall, both in their twenties, have been busy the past three years building one of those new farm enterprises that are so difficult for banks to assess. They don’t know how to evaluate, for example, the mobile chicken coops and garlic planting parties that are the business of life on Mighty Food Farm.
Currie and MacDougall work 40 acres producing fruits, vegetables, and eggs for 150 farm members, two farmers markets, and several wholesale accounts, including a nearby school and college. They recently financed new equipment with a microloan from The Carrot Project.
The farm credit scorecard now in development is the kind of tool that can further bridge that gap by helping the new farms fit their business models into a bank’s comfort zone, while also expanding lenders’ understanding of this emerging sector, said MSU’s Susan Cocciarelli.
It could also pave the way for related agribusinesses like Organic Renaissance to get a regular bank loan, rather than the quasi-public economic development financing the company finally received.
“If we can apply the credit scoring methodology that has helped banks loan to small businesses, the hope is we can at least bring more money into this new farm sector,” said banker Denise Dukette.