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Money is the universal lubricant of business. It makes all the parts work well together when it is applied in the proper places, at the proper time, and in the right amounts. Many inexperienced persons have the idea that business can be carried on more successfully as increasing amounts of money are added. Nothing could be further from the truth. The failure of numerous businesses can be traced to the inappropriate and untimely use of more money than is required by circumstances. My purpose in this section is not only to suggest ways and places to obtain money for your horticultural business, but also to briefly point out how it may be used wisely. Your effort to use money for making more money will be doomed to failure unless you carry out the second step of the equation as successfully as the first. In general, various topics about how to obtain funds by borrowing or related means will he discussed. Less frequently money which do not require repayment (the latter are understandably more rare in occurrence) will be mentioned. I’m sure that most readers already realize (at least in a vague way) that borrowing or using someone elses’ funds is going to cost money. The reason I mention this fact is that many people have a predisposition to ignore the horrible news unless it stares them directly in the face. Another reason for emphasizing this is the common practice of lenders to gloss over the often outrageous costs associated with loan repayment. Get this basic lesson firmly planted in your head right now—people generally expect to be paid handsomely for letting you use their money. After all, it is perhaps their most prized possession! Although borrowing or using other peoples’ money entails some risk and significant costs, almost everyone engages in it. Why so? Because the borrower expects to enjoy certain benefits from using these funds. When borrowing for business use, you presumably expect to make a profit greater than the loan cost, or, perhaps, you will be able to get started on a long term project sooner than if you slowly saved all the necessary funds. Be sure you always carefully examine whether the hoped for benefits will significantly outweigh the cost of capital. A caution about borrowing has been raised now so that you will hopefully interpret the remaining information with a sober eye—unwise or uninformed borrowing is at the root of many problems in society and is the cause of untold personal misery. Be sure you are fully appraised of the downside aspects you may encounter when making use of loans or related financial vehicles. Now that the proper cautions have been posted, it is only reasonable to tell you that most successful businesses are built upon some form of borrowed capital. You are more likely to amass a fortune and to do it more quickly if you make use of the additional funds someone else can supply. Many, perhaps most, businesses would never be started if borrowed capital were not available. In addition to making things happen more surely and quickly, extra money can also make things easier for the budding entrepreneur. Money enables us to purchase and make use of many modern conveniences such as machines, labor, information, etc. Borrowed money can help make your life easier and more prosperous, but be sure you use it in ways which lead to these desirable goals. SOME COMMENTS ABOUT BUSINESS AND MONEY: Before you seek financing for a new or existing business, there are several points which should be thoroughly considered. Each of them is related in some manner to the subject of “risk.” Successful business persons unconsciously endeavor to minimize the risk in every aspect of their venture. The most useful tool you can possess in order to make a business less risky is a “business plan.” This plan should provide a broad outline of objectives to be reached and the methods that will be used to attain these goals. Business plans should always start with an overall perspective, and then provide some detail about specific aspects of the outline. How much or how little detail is included depends upon how the plan will be employed. In general, a good deal of detail is necessary when business plans are utilized for evaluating the financial aspects of a business. Basically, you want to construct a hypothetical picture of how profitable your business will be and how and when the money will flow through it. This information allows you to plan ahead for your money needs and for eventual repayment of loans. I can offer certain other advice about how to reduce the risk as you start up a horticultural business. These points certainly do not cover every specific area but do include the major aspects. My first suggestion for budding horticultural entrepreneurs is always—work for someone else in a similar business before you start your own. This experience is the most valuable tool you can have in planning your own venture, and it will be an important consideration whenever you apply for loans or grants. Another business strategy I always recommend is to develop a venture in step-wise fashion. In other words, arrange your business start up so that certain critical phases of it are completed and proving profitable before the next stage is begun. This allows you to concentrate capital in specific projects, and it means that money is not being invested in more than one unproven venture at any time. Adopting this one-step-at-a-time strategy can often lower start up costs significantly. I’m sure you can also see how it reduces risk. In general, extra money can be more effectively and safely used in businesses which have developed successfully past the start up phase. In this stage you usually know whether or not borrowed money can be employed profitably with little risk. Start up ventures often fail within a relatively short time. This fact should prompt you to ask: Is it prudent to borrow money when first starting a business? The answer is: It depends upon how carefully you have prepared and analyzed a business plan. If a well done plan shows the venture will make money, then borrowing is justified. If the opposite is true, or if you have no organized plans, don’t borrow. You should not gamble with borrowed money. Gambling is permissible only with money you can afford to lose. The business plan you construct and use for predicting future results is the key element which transforms a business start up from pure gambling into a well-calculated and acceptable risk. We could certainly explore many further aspects of general business theory, but this is not the specific objective of the section. Key points have been mentioned because they are especially important to keep in mind as you digest the following information. MONEY MANAGEMENT TIPS Borrowing money is serious business. You should manage the funds obtained in a responsible fashion, so that both you and the lender benefit from the transaction. Borrowing without proper guidelines is one of the surest routes to financial ruin. Listed below are a few (not all) important points of which you should take note. Several more management tips are mentioned under the heading of Analysis and Documentation. • Every potential borrower should determine whether there is a more acceptable alternative means of reaching the objective. • Hard work can often be substituted for at least a portion of the borrowed funds you need. • Reduce your requirements for borrowed funds to the absolute minimum. Step-wise business start up is one means of doing so. Leasing and renting facilities or equipment instead of purchasing is another. Careful management of inventory and inventory payment terms can also reduce the amount of money you need. • Don’t borrow money simply because it is available, too much can sometimes be bad—especially for a beginning business. • Analyze exactly why you need money, what you are going to use it for, and how and when it can be repaid. • Borrow only when it will be profitable to you. Then use the money for the shortest period of time possible. The cost of money is based upon risk, amount, and time—if you increase any of these factors, the money will cost more. • Borrow at the right time and place. The price of money varies tremendously with each of these factors. Both can be controlled to some extent if you take the time to become knowledgeable. • Determine whether your money needs are short term or long term, or a combination of both. The time factor can affect many aspects of cost, availability, repayment, etc. • There are many different avenues for obtaining loans, grants, or similar financial packages. Investigate availability in your specific area, and pursue the ones most suitable to your purposes and circumstances. The best package for you may be the worst one for the next person. • Being a borrower requires real discipline. If you cannot be a responsible borrower, don’t do it in the first place. • Every business person should line up a source of emergency credit for unpredictable needs. This source must not be used for ordinary business purposes; it should be firmly reserved for important unusual situations. ANALYSIS AND DOCUMENTATION: The suggestions listed below are a part of the overall money management you should employ when borrowing, but they fall more specifically into a group of analysis and documentation procedures. • Take stock of all the resources you possess—both concrete physical items (such as land, home, stocks and bonds, life insurance equity, vehicles)—and implied resources (which may include good credit history, lack of debt, good education, references, friends, family, experience, stability of residence and employment). All of these factors can be important as you apply for loans, grants, and related financial help. Although concrete assets will usually be the most important, there are many situations in which implied assets could be a major factor in your favor. • The financial statement mentioned earlier in this guide will be a big part of your documentation efforts. It should be carefully filled out since it will most likely be used as a basis for loan approval. Giving false information on loan applications is against the law. • Be aware that money is a commodity just like anything else—it is costing you money. Know the market price and know the potential costs in terms of time, control, and other factors which may be placed upon your activity. • Project ahead the amounts which you will need within defined time frames. In other words, know how your money will flow through the business. • You must see enough future cash flow to pay interest and principal plus an eventual profit. • Evaluate the borrowing contract carefully, even if the agreement is between you and a relative or friend. Plan on sticking to the agreement religiously right from the start. Have a competent lawyer look over major contracts, but don’t rely upon the attorney to catch every possible problem; the final responsibility is yours alone. Grant contracts may also have strict guidelines and rules; you should look at these carefully—especially if you are required to sign any legal documents. • Always document borrowing costs and grants as they may relate to your federal and state taxes. You will need this information in detail. MONEY SOURCES: The types of money sources and the amounts of funds available will vary with circumstances. Such factors as geography, time, economic conditions, applicant eligibility, and political conditions will all have some effect upon your chances of obtaining loans and grants. You must survey the possibilities in this regard, and narrow the search down to a manageable number—perhaps 3 or 4 at the outset. Concentrate your efforts upon these few which seem to offer the best prospect of fulfillment. Presenting a well-organized request for loans and grants is often a Jot of work — especially if they are directed towards the more bureaucratic channels and if they involve larger sums of money. The sources of money listed below certainly do not include every possibility but do represent most of the avenues which a person is likely to find available. You will see that certain categories are discussed in greater detail. Generally, these sources deserve greater attention because they represent an acceptable and easily usable pool of funds for a large number of people. There is certainly some personal preference on my part, this does not mean that your experience will yield the same results. I offer one caution before you proceed further. Please view every advertisement and offer which proclaims free money or fast money with a careful eye. While some of these offers may indeed have merit, the great majority use these headlines only to get your attention. Relatives and friends: Aside from personal assets, this is the most common source of start up funds for small business people. It shouldn’t be! You may jeopardize close relationships by using friends and relatives as money lenders. Even when the business is a resounding success, and everyone is paid back according to schedule, some strain may be introduced into the relationship. I don’t have to tell you what happens if you can’t retire the debt as promised. If you must borrow from family or friends, insist that everything be formally written down just as if you were getting the money from a bank. This will help you make sure there are no misconceptions which will come back to haunt you in the future. Banks and commercial lenders: A person might think the local bank or savings and loan would be a prime source for small business start up funds. Don’t get your hopes up! Unless you have iron clad collateral, some type of government loan guarantee, or you catch them at a weak moment, banks are not likely to take a risk on you. Bankers are very conservative and like to make their money on sure bets. Occasionally some form of lending hysteria (one of which took place in the 1980’s and precipitated the great savings and loan scandal) overcomes their caution. But then the easy money usually goes to slick talkers or old school chums, rather than well- intentioned people like you and me. Banks not only desire collateral, they want you to show a demonstrated ability to repay the loan. Taking possession of your belongings is a messy business (and it may be expensive), and it isn’t what they really like to do. They would much rather receive their payments on schedule. So even if you have adequate collateral but cannot show a steady income source adequate to meet monthly loan payments, don’t count on getting a loan. There are of course various other private companies who are in the business of lending money. Some of these are more-or-less on par with banks or credit unions as far as their integrity and amount of interest charged, and most are reliable firms but charge higher rates than banks, while a few private lenders border upon being unscrupulous, at least with regard to the interest charged. While banks and commercial lenders are not especially receptive to start up business loans, they are extraordinarily receptive to home improvement loans. It may well be that you can obtain financing for certain business-related expenses through a home loan. Most banks are glad to extend credit for recreational greenhouses if the structure meets certain criteria. Improvements for nursery and perennial beds might also be eligible. Loans for small garden type equipment are available not only through the bank, but most all large stores dealing in this type of merchandise have a time payment program which is easy to utilize. Home improvement and similar type loans are relatively easy to arrange and can take a good deal of the hassle out of getting the money approved for a project. But I must make it clear that providing false information for loan purposes is against the law. As long as the improvements are made according to specifications in the loan agreement, you will have no problems. But applying for home improvement money, and then using it for totally unrelated purposes, exposes you to legal action by the lender. The improvement must be for a bonafide purpose which the lending agency gives approval. Incidental use later in your home business will not upset them. There are several types of assets upon which banks or other types of commercial lenders will loan money. Your home, vehicles, major equipment, land, life insurance cash value, stocks, and bonds may be suitable as collateral. This depends upon the policies of the loaning institution. Guaranteed loans: Because commercial banks and lending institutions are reluctant to supply small business start up money, various government agencies often act as guarantors of these type of loans. You still borrow the money from a local source, but all or part of the loan repayment is guaranteed by government agencies. The Small Business Administration is perhaps the best known of these agencies but there are several other federal programs and numerous individual state and local government counterparts. (State Farm Loan Boards, Community Development Authorities, Federal Loans for Rural Development, etc.) If you are located in a basically agricultural area, the local county agent can give you a line on various agricultural loan programs offered by state and federal agencies. And in cities there are all types of programs for minorities, disadvantaged persons, and neighborhood improvement. No matter who you are, chances are good that some special program exists to help you get started in business. It is up to you to do the footwork, and locate the specific program which suits your needs best. Seldom does anyone walk up and give you the money, you have to find out where it is and then ask for it. Since the local bank is often the conduit through which these governmental loans are channeled, the loan department is a good place to visit for preliminary information. Most of these sponsored loans cost less interest than a similar commercial loan, but they may involve more paperwork since the government is involved. In the past few years, many communities and counties have become heavily involved in economic development. Some of them actually make funds available for new and existing businesses, while some may only offer tax breaks, technical information, or low-cost locations. State governments also offer similar programs. If you live in a small town or small state, these programs can sometimes be more easily arranged since you (or your close acquaintances) may actually know people who have a contact with the programs. Personal relations are often important in getting a good break. Financial grants: Grants are the best financial aid you can receive. As the name implies, you are not required to pay the money back. It is free if you qualify. Needless to say, there is less likelihood of finding a grant than of obtaining a loan. Many governmental agencies have small business grants available. These grants mainly cultivate opportunity for disadvantaged population groups and individuals. Some grants are awarded with the idea of stimulating new technologies or to support particular industries. At the present time, the ecological movement provides the impetus for a favorable outlook concerning grant availability for horticultural projects. If you live in an economically depressed area, there may be a good deal of economic development aid available through state and local agencies. These entities are perhaps the best source of grants for the ordinary person who has no special disabilities or needs. Loans through these avenues are even easier to obtain and usually carry a low interest rate. Economic development grants may be used to finance any stage of a business, but they are commonly awarded to help businesses plan the feasibility and marketing of products, or to train and hire local workers for the new enterprise. As with loans, it is up to you to find out what grants might be available in your area. If you are associated with or know of a particular special interest group, this is a good place to begin inquiring. Your city and state government may have personnel who specialize in helping citizens locate grant sources. The local county agent’s office will be able to point you towards possible grant money in the areas of horticulture, agriculture, home economics, education, etc. Local educational institutions such as community colleges may be able to steer you in the right direction. Most colleges have a grants coordinator, and, while they may specialize in educational matters, it is highly likely they have information pertaining to your needs or can put you in contact with the proper people. Public libraries usually have a data base which can be accessed to locate available grants. Ask the librarian if you are not familiar with how to use the facilities. Since a grant provides something of value for free, you can imagine that the competition is often severe and that the people who seek grants are sometimes looking only for a handout. When you apply for a grant, don’t act as if you expect a free lunch—show that you are willing to put something into the project. Often times you will be expected to contribute money to match the grant available—if your venture is viable, this should not be objectionable. Some grants are not worth the effort—particularly ones which require an extensive application process or which place too many restrictions upon your business activity. Be sure to evaluate these conditions, and be certain of your financial obligations to the granting agency. Some grants are called grants but contain contractual obligations which require eventual repayment—in effect being more of a deferred loan. Partners: People become associated together in business for many reasons, but one of the most common factors bringing business partners together is the need for money. Partners may pooi their monetary resources or one may contribute most of the money while the other contributes mainly expertise and time. Partners in business can be a good source of financial help, but they want something which an ordinary lender does not demand: a part of the business. You should think long and hard before mortgaging the future control of your enterprise. If the primary need is for money, rather than some other valuable asset a partner can bring into the business, I would suggest that you exhaust all other means of financing before becoming involved in co-ownership. Life insurance, stocks, bonds, retirement accounts: Like many people, you may have assets which can be borrowed against almost automatically—if the assets are in the proper form and in easily accessible accounts. Many stock and bond brokers will allow you to “margin” (borrow) against your stocks and bonds. This process is usually ridiculously easy. They may also allow you to do the same thing with retirement securities or CDs. In most cases, you can simply sign a “Margin Agreement” (which your brokerage house sends out) and then have the representative place your assets in a special “Margin Account.” It really is that easy if you qualify for such accounts. Your broker can easily tell you the details in 5 minutes over the phone. All brokerage houses differ in their policies somewhat—check out several. You can easily switch your securities from one to another house by simply signing a transfer form. The argument may be made that if you have extensive stock, bond, and retirement assets—you do not need to borrow money. This may be true to some small extent, but there are many situations in which it is wise to borrow money for good projects rather than doing without, or it may be better to borrow short term rather than selling other assets to provide capital. I have several margin accounts which I can utilize by simply making out a check drawn against the account. Of course, margin accounts must be used only for good purposes, otherwise you can find yourself in hot water quickly. It is just like overdrawing a checking account. And you should not choose a broker simply because they provide easy access to margin money. A broker should be selected mainly because they offer the best services related to investment vehicles. You must understand that when borrowing against securities, the money is coming out of your portfolio—which will be worth less until you replace the borrowed amount. And the broker is charging interest on every dollar he loans you. Margin accounts should be utilized only by persons who are sophisticated enough financially to use them safely. It takes discipline to properly loan yourself money by making out margin checks. Retirement accounts and life insurance equity are assets which can be easily used as loan collateral. Your banker or stockbroker can tell you quickly how to borrow against retirement accounts. Life insurance loans can be made through the bank or directly with the insurance representative. The cash value or loan value of insurance policies at various prescribed dates is usually found in tables which accompany your policy. Credit from suppliers: In my estimation, supplier credit is the most useful, most economical, and easiest way to obtain financing for your business. Suppliers are eager to sell you products and they normally have a ready made line of credit if you have a good personal credit history and comply with minimal credit application procedures. Many suppliers will rely upon their personal evaluation of you if you visit them beforehand. Remember, every supplier has competitors to worry about. If one company won’t extend credit, ask another until you find someone who is more eager to do business. Credit policies vary greatly from one supplier to another. Some will give you the fifth degree, while others will allow you to charge with little more than a short personal visit. The best way to obtain supplier credit is to prepare a credit history and obtain references from your bankers and other credible people who know you. Then arrange a personal interview with the supplier—this face to face encounter is important. It is easy to say “no” over the phone, but, unless there are compelling reasons, the answer will be “yes” in person. If you are going into business, start developing supplier credit 6 months ahead. Visiting with the company’s salesman is a good start; he or she is always anxious to find a new customer. Talk over your plans with salespersons and ask their advice. You will often learn new things about the field, and, even if you don’t, the salesperson is the first step towards obtaining credit, sometimes it is the only one necessary. Starting early allows you to make a few small orders on credit and then pay for them on time—this may be slightly inconvenient, but it establishes your credit record with the company before you need to purchase supplies worth thousands of dollars. Chances are that with 3 or 4 previous purchases you can develop an almost unlimited credit line before you really need it. As you develop a larger number of supplier credit accounts, it is not difficult to see that you could have the equivalent of a $100,000 loan which is interest free. By working your inventory carefully, you may not require money from other sources. Many larger horticultural companies sometimes have a $100,000 credit line with only one particular supplier and similar credit with several others. Even if you have only a small business to start you can see that a $1,000 to $5,000 credit line would not be considered unusual at a supply house. Most suppliers have a net 30 days credit policy. This means that you have 30 days from the date of shipping until payment must be made. In many cases, this payment period may be extended to 60 or 90 days. In the agricultural and horticultural industry, it is not unusual for terms to be extended to cover the entire growing and marketing season—this may be 6 months or longer. Be sure to ask your suppliers about their “time dated terms” or “growing season terms.” Not all will have them but a large number do. Of course, the supplier has his cost of financing your orders priced into the merchandise. You will likely be paying a hidden interest charge, but in most cases this charge is less than what a bank or other source might want for a similar loan—and the supplier is very anxious to set up your credit if you will only supply convincing reasons of your credit worthiness. This is the beauty of supplier credit: they are almost begging you to use their credit line while banks and other institutions may act as if you are somehow an inferior human being as you approach them for a loan. And suppliers are in your industry—they already believe it is a great business. You don’t have to convince them that horticulture is a bonafide member of American industry (this is often a stumbling block at other lending agencies). Banks sometimes refuse to make horticultural loans because they don’t regard such ventures as part of the mainstream business community—bankers are very conservative, and they don’t like to get involved in anything they haven’t seen a hundred times before. There is another plus to supplier credit—you may often be able to extend the terms easily by simply not paying your bill on time. Although most suppliers specify that they charge interest on unpaid balances, many do not make a policy of actually trying to collect it. If your terms state net 30 days, you can often pay the bill within 60 days and the supplier will still be happy. The downside of not paying on time is that you risk alienating a good source of credit— don’t employ this tactic too often, and don’t do it without good reason. There are several points to summarize again before leaving the subject of supplier credit. • This is your best source of cheap, easy credit without restrictive conditions. • Set up supplier credit early. • Suppliers are anxious to do business. You are in the driver’s seat if you take the time to convince them of your credit worthiness. • The supplier believes in horticultural business already, other loan sources probably do not. • Supplier credit is often free—in most cases you would pay the same price even if you paid cash. • Know your supplier and salesperson personally; it is hard to deny a friend. • Be sure to ask about extended terms. • Suppliers vary greatly in their response to new credit accounts— shop until you find ones that are accommodative. Leasing: Many people find that leasing vehicles, equipment, and facilities is an effective means of obtaining the things they need to run a business. Of course there are many requirements which cannot be obtained by leasing (consumable items such as inventory, labor costs, utilities, etc.). Although leasing is quite similar to borrowing, there are some important differences. Leasing costs are generally treated differently for tax purposes—the entire cost of leasing often is taken as business expense during the year the expense was incurred. In many cases, the lease may be terminated while the item still has considerable value; therefore, the person leasing is not obligated financially for the entire original cost. Standard leasing programs are available for many types of equipment (most notably for vehicles and similar mobile machines). These programs are often more convenient than applying for a conventional loan. In recent years a few leasing companies have offered programs specifically set up for horticultural businesses. To my knowledge, these programs are intended for larger operators and will not be of much use for beginners who need only a few thousand dollars worth of equipment. Unless you operate under particular circumstances where leasing may be advantageous, you are generally better off to borrow money at good rates and purchase the equipment outright. Only an analysis of each situation can show whether leasing or borrowing is a better deal. Renting facilities and equipment differs from leasing mainly in the time span which the items are utilized. It is seldom an advantage to rent for long periods. Renting is helpful in some cases where you want to make certain a particular item will work well in your operation before it is actually purchased. Venture capital and stock offerings: I mention these means of obtaining capital mainly to tell you to forget about them unless you plan an extremely large horticultural operation. Transactions of $1,000,000 are small potatoes for venture capital and stock offerings. Much larger deals are more often the rule. Deferred labor costs: Under certain conditions, you may wish to consider obtaining labor for your operation by offering specific workers a future share in the business in place of a current weekly wage. This amounts to taking on partners and should be approached with a good deal of caution. It is not a good idea unless there are overwhelming benefits. Credit cards: Everyone can make use of credit cards to some extent when running a business. Most of you are probably more familiar with this type of financial instrument than I am, so I will not comment at length other than to say money borrowed by using credit cards is usually much more expensive than arranging a commercial loan. The big advantage to credit cards is the convenient and near universal availability of them. And, at present, some pretty hefty credit lines can be arranged by this means. Of course, the ease with which credit cards are obtained and used is always a danger for inexperienced or poorly disciplined people. Personally, I use credit cards only for daily incidental expenses or for travel—and I have arranged for a good line of credit through them for emergency purposes only. Free money advertised: No doubt most of you have seen many headlines in various magazines proclaiming the availability of Free Money or Free Grants or Immediate Loans. While I cannot judge all these offers, I can say that the few I have checked into are no more than scams directed at people who have nothing better to do than chase rainbows. If you are serious about running a real business, forget about these free money programs and direct your efforts to more realistic work. GET STARTED NOW I must emphasize in conclusion that getting an early start at arranging financing for your business can make the difference between success and failure. Not only does an early start assure that the money is available when you need it but also at the lowest possible expense. In many cases, there is no better way to become familiar with business financing than to plunge in and make a trial run with various avenues you might wish to employ. This method of learning the ropes costs only some of your time. There is no obligation on your part unless you sign legal papers (hopefully you will not do that until you are thoroughly familiar with each alternative). Prev. | Next: How to grow plants, trees and flowers faster and easier |