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The bank oriented roaster environment: part 1.

Specialty coffee is developing into more than a neat little market segment, where small entrepreneurs risk their livelihood on their own good judgement and intellect. Two-thirds of the specialty wholesalers, according to a 1991 SCAA survey, now have sales in excess of one million dollars. Half of that number (one third of the total) have sales in excess of 3 million dollars. While these numbers are dwarfed by general American business standards, it is impressive to see how far and how fast specialty roaster/wholesalers are leaving the Mom & Pop organizational phase behind and are entering the larger corporate world.

Among the challenges facing a growing small business is the continuing need for money to fuel growth. It is not unusual to see a profitable specialty roaster choking for cash. The funding of inventory, accounts receivable, sales and marketing, and capital expenditures for real estate and equipment does, after all, cost money. This month and next, we will explore ways to develop the funds required to grow your enterprise.

In the initial business phase, personal savings and loans or investment by relatives and friends may meet the enterprises' financial needs. As needs reach into six figures and beyond, these financial resources are rarely adequate. The first difficult business decision of growth has more to do with how to talk to a banker than whether to sell flavored beans.

Some choose the security of slow growth, sustainable by their cash flow. This is a prudent decision for those who are comfortable with the level of risk already inherent in an entrepreneurial venture. Other, more carefree folks, eager to meet the next challenge, choose the option to finance their business from traditional lending sources.

Before talking to your bankers, have a long heart-to-heart talk with your business planning consultants: accountant, attorney, spouse, parent, etc. Then check out programs that may be sponsored through your state or local governments to aid growing small businesses.

Many of the states and several municipalities offer incentive programs through government agencies or government/private sector organizations for businesses who are moving into or expanding within their boundaries. These may include tax incentives, help with certain expenses, job development training, etc. Local utility suppliers may have reduced rate programs available for expanding manufacturing facilities within their service areas. These types of assistance programs may prove, in some cases, to be more pie-in-the-sky than reality, having narrow definitions of who may be eligible and under what circumstances. In addition, being bureaucratically administered, they tend to be heavily laden with paperwork and frustration. Still, you may find some that are useful to you with benefits that can actually help your business grow. It is worth checking them out.

Prior to visiting a financial institution, there is some homework to do. A written business plan should be prepared. This should begin with a synopsis of the specialty coffee industry, its history, activity, and projected growth. The Specialty Coffee Association of America, Find SVP, and Gourmet Retailer Magazine are excellent sources for industry facts and figures. A source list follows this article. Prepare and include a short description of your company: including history, territory, products and services offered, etc. Ask your tax advisor to prepare three years' financial statements on your company. Add to this a well crafted forward plan for the study of the lender. This plan should include a budget estimate for the new anticipated expenditures as well as projected operating statements and balance sheets for the period covered by the forward plan showing, in part, where the money will come from to repay the financing you are requesting. A short business biography of the business' principals should also be included. Make several copies of this information (they will come in handy) and have the material indexed and in a presentation binder.

A bank may make an essential working partner, and an amiable banking relationship is helpful toward attaining business goals. It is a mistake to believe that your bank is your friend. It is an institution whose sole "Raison d' etre" is the further development of its assets by renting those assets on a fee basis. Often, to secure its investment, it requires the personal guarantee of corporate officers, and/or the collateralization of loans (sometimes in excess of 100%) by cash value assets such as financial instruments, cash value of insurance or securities, etc. This may be in addition to guaranteeing the financing with the business's assets of real property, equipment, inventory, and receivables.

The Small Business Administration (SBA) offers loan guarantees to foster small company growth by making lending institutions feel more comfortable in loaning to the little guy. SBA is rarely a direct lender. It guarantees your loan's repayment to a lending institution, thereby taking a substantial portion of the risk away from the lender. SBA loan guarantees rarely exceed $750,000. The SBA guarantees 85% of the loan amount. These guarantees are available through selected lenders in every state and can be a real help to those who are having difficulty finding bank financing.

SBA loan guarantees are available for real estate, equipment acquisition and other business needs. There is an SBA program, for instance, to help a small business to finance new orders. There are programs for seasonal credit lines and special programs for particular regions of the country. New England small businesses, as an example, are currently eligible for a revolving credit line program not offered elsewhere. There are short-term financing packages as is the one for new orders (12 months) and long-term financial programs secured by the business's equity and personally guaranteed by the business' principals. There is even an SBA program to guarantee working capital loans.

Recently, bank real estate loans, at a rate usually one or more points above that offered for home loans, have been available on a balloon or self-amortizing basis. These are usually presented in several plans on a term of up to 20 years.

Equipment loans (secured with a chattel mortgage and the personal guarantee of principals) have been available on terms of five-seven years, and an interest rate higher than on real estate loans.

Though traditional bank financing may be available to your company, many choose to seek financial services in a variety of innovative ways aside from banks.

If you are planning a plant construction, or expanding an existent plant facility, talk to the major equipment manufacturer. They may be able to plug you into a plan that they have worked on, with a lender, that is tailored for our specialized industry.

Leasing equipment, rather than purchasing, may be an option you should consider. Though more costly than purchasing, many borrowers prefer lease financing of equipment because it may not need to be listed on the company balance sheet as a liability. Additionally, there is often no down payment requirement in a lease plan. Lease payments may be a tax deductible expense. The same asset, in a purchase, may have to be depreciated over the term of its useful life.

Coffee processing equipment is not readily saleable on foreclosure at full value. If leasing is of interest to you and you are having difficulty finding a financing company who knows what a form & fill machine or a stoner boot are, talk to the Equipment Leasing Association of America. They may be able to steer you to reputable members of the industry with representation in your area.

Some financial sources are quite close to home. A frank discussion with key suppliers may result in their willingness to permit a good customer with a reliable credit history to extend credit terms. This form of vendor financing is not unusual in the trade, but has several pitfalls; Remember? There Ain't No Such Thing As a Free Lunch (TANSTAFL). The vendor may require personal guarantees from corporate officers. In addition, there will be a dollar price for this financial service. It may take the form of price adjustments upward, lower discounts, elimination or reduction of promotional allowances, or an interest factor added to balances.

A minimum purchase agreement, or an agreement that guarantees the lender business during the period of the financing or beyond, is the usual result of a meeting of the minds with a valued supplier.

As a practical matter, it is tough to complain about quality, service or deliveries to a guy to whom you are financially indebted. Quality may become a somewhat flexible commodity to the supplier who is avaricious or who just plain feels uncomfortable in his business relationship with you. Remember, you will rise or fall on the quality of your products, and you are paying a price for the use of his money: CAVEAT EMPTOR.

The most uncomfortable scenario for a customer takes place when a supplier becomes entrenched as a banker, and the customer is dependent on the good will of the supplier. The customer's comparative weakness may encourage the lender to impose management restrictions on the customer. This may even take the form of an executive leash being imposed on management. This leash, in the form of a key executive placed high within the borrower/customer's organization, acts as a control for the lender's benefit. There have even been cases where the supplier swallows the customer whole. All gone!



Find SVP 625 Avenue of the Americas New York, NY 10036 (212)645-4500

Specialty Coffee Association of America One World Trade Center, Suite 800 Long Beach, CA 90831 (310)983-8090

Gourmet Retailer Magazine 1991 Subscriber Survey 3230 West Commercial Boulevard Fort Lauderdale, FL 33309 (305)731-0000.

Small Business Administration Washington DC Office (800)827-5722.

The Equipment Leasing Association of America 1300 North 17th Street, Suite 110 Arlington, VA 22209
COPYRIGHT 1992 Lockwood Trade Journal Co., Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:issues involved in starting up a specialty coffee roasting business; includes related information on sources of finance and other services
Author:Schoenholt, Donald N.
Publication:Tea & Coffee Trade Journal
Date:Nov 1, 1992
Previous Article:Kimbo - arising against fierce competition.
Next Article:Value added gets serious: coffee producer takes message on the road.

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