The Inside Scoop On How Growers Can Up Their Funding Odds
Image courtesy of CropKing
Funding is a constant headache for many getting started, or even just keeping on, in the indoor ag world. We chatted with Contain’s VP of Business Development, Doug Harding, to get the inside story on what lenders are looking for, and the best ways to up your odds of getting funded.
What main things are funders looking for?
Startups are going to be construed as riskier by any lender. They really don’t have a track record. In some cases, they don’t have the experience.
They have to have a thoughtful business plan. They’ve got to figure to commit some capital. We have a lot of people that come in and think that they can do it with no commitment on their own and hope that it works. Really, if you think that through, all the risk then lies with the lender, and that’s probably not going to work.
Image courtesy of Doug Harding
How much capital should growers expect to put in upfront?
It really depends on the size of the deal. Focusing on startups, 20%. In some cases more.
If they have more it can help get them more favorable terms on financing. If the lender requires an absolute minimum of 20%, and the customer has a pretty well thought-out business plan, is dealing with a reputable vendor, and maybe even has an offtake agreement, where they know they’re already going to sell their product, and maybe they’re going to come up with 40% down, they’re going to get a better offer.
It could be a longer-term. It could be because of that additional down they can help shorten their term, and that’s what a customer should always try to do. When you’re borrowing money for the first time for a startup business, keep the term as short as possible. You’ve got to afford the payment, but you’ve also got to assume your cost of capital after you prove yourself can be dramatically lower than when you first start out.
What are some other ways to bump up your funding odds?
Be reasonable with your size. When you’re first starting out, make sure, even though you think you have everything thought out in your business plan, start off smaller. We have some first-time growers that want to start off with a $5 million project with limited capital and no experience, and it’s just not going to work. Even if we could get that funding, why would you want to gamble that much before you really know what you’re doing? So start off small, get a feel for it, make sure that it’s something you have passion, ability, and time for.
What’s a common misconception that lenders have about indoor ag, compared to something like financing cars or houses?
A common misconception would be that even some of the experienced lenders in the industry really still are very uncertain on what the equipment’s worth. When that happens, they’re going to tend to be more conservative. They’re going to focus much more on the grower, and it may manifest in the form of insisting on more money down, just trying to dot their i’s and cross their t’s.
How can growers get around that reluctance?
It’s somewhat static. What they can do is stick to their business plan. If they’re successful in obtaining their funding, I’d tell them to work hard, and prove themselves, and show a track record and help prove the industry right.
We all know that everything about this industry makes sense. You can spend a whole lot less money. You can hedge your bets with climate conditions. You can grow year-round. There’s a growing need for food, as our population will increase for the next 30 years. Prove yourself. There’s not much they can do upfront other than making sure that they have things well thought out.
What are some common funding mistakes first-time growers make?
I think sometimes growers place too much emphasis on some of the initial conversations they have as far as where they can sell their product. It’s a long road to actually start growing and have the quality of product and still have that relationship intact, so I think one common mistake is that although it’s very prudent for potential growers to have a source of where they’re going to sell their product, it shouldn’t be the basis of their decision to start growing.
My advice is to not put all your eggs in one basket. If you get that kind of response, go talk to five others, and figure on not having just one source to sell your product to. Things could change.
What do the next five years in funding indoor agriculture look like?
That’s a real positive thing in the industry. Lenders are in business to generate a profit. In the next five years, as more and more lenders jump in—and it’s always a slower process at the beginning—other lenders are going to see the opportunity. People are going to understand what things are worth that they don’t know now, and it’s just going to be an evolution as it always is in a new industry.
That’s one of the really optimistic things about where Contain has positioned itself. We’re at the forefront of that. There’s only an upside ahead. Lenders are always looking for an opportunity, and there’s a giant opportunity in indoor ag.
Any final pieces of advice?
No one likes applying for financing. It can be a very frustrating process. If you’re trying to do it through traditional sources, it can almost lead to insanity. I mean, most people just don’t have the patience for it. It leaves you second-guessing your decisions.
We think that we can help dramatically speed up that process and take that frustration out for many customers by being aligned with the right lenders. Customers still need to be patient, but they need to understand that working with the right company can make their life a whole lot easier.
This conversation transcript has been lightly edited for length and clarity.
Learn more about Contain and funding your indoor ag business at our website, and subscribe to Inside The Box, our weekly newsletter.
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