Finding Capital: Financing Options for Meat Processors
What's on this page?
Upgrading or expanding an existing meat processing plant, building a new facility, buying equipment... it all costs money, and plenty of it. The information on this page will help you understand and navigate financing options that fit your processing plans.
Q: What are my financing options? Which one is best for me?
Q: What about grants? Is there public money available for meat processing?
Q: How about impact investors? Do they invest in meat processing?
Q: Financing in Action: Real Stories from Real Plants
Types of Financing: Defining Terms
Many different kinds of financing are out there. The first step is figuring out which type is best for you and your business. Some options are familiar to many of us: getting a bank loan, borrowing money from friends and family, or maxing out your credit card(s). Other options -- like royalty financing and sub-debt -- may be less familiar.
Here are brief descriptions of four main options:
- Debt: traditional bank debt, like a home mortgage. There is a fixed monthly interest rate and interest/principal payments. From the bank’s perspective, debt is the least risk for the lowest reward. Banks can’t have a loss rate greater than 2%, so they need to be right 98% of the time. Thus, they don’t give out loans they don’t think they can collect on.
- Equity: this is the highest-cost capital, usually available to “riskier” business opportunities (start ups, speculative opportunities). The equity investor receives no payments until the business is sold (typically within 3 - 5 years of the investment). The proceeds are then allocated based on the percentage of ownership. If you do not want to sell your business, at least in the short-term, equity probably isn’t your best option. It is possible to convert equity to debt and pay off equity investors through dividends, but most equity investors want to be paid off through sale. And unless your business is very profitable, it is hard to afford paying dividends.
- Sub-debt: the same as debt, but subordinated to other debt. If there is a loss or the business is liquidated, the primary debt-holder is paid off first. The sub-lender doesn’t get anything until the primary lender is paid in full. Other than this, sub-debt is structured in the same way as debt: a fixed monthly interest rate and interest/principal payments. You’ll pay a higher interest rate (typically in the range of 6 -12%) to a sub-debt lender because the lender is taking on greater risk.
- Royalty participating debt: This is an investment, not a loan. Royalty investment typically fills the gap between debt and equity. Monthly payments are made based on a percentage of gross revenue for a negotiated term: royalty investors are paid back from the business cash flow, from the beginning. Unless your business has a high gross profit margin (say, 25% or more), you probably can’t afford this. This is not a good match for businesses with thin margins.
For in-depth information about these and other options, check out the Financing Options handout from the New Hampshire Community Loan Fund and Vested for Growth.
Which One Is Best for Me?
Now that you know the different types of capital, how do you figure out which one is best for you? This will vary based on your specific business goals. The “Capital Compass” tool, created by the NH Community Loan Fund can help you determine which option is best for you. The tool asks you a series of multiple choice questions and shows you your potential suitability for different types of financing. The whole process should take about five or ten minutes.
Once you figure out which type of capital is best for you operation, check out The New Hampshire Ag Financier’s Group “Becoming a Prepared Borrower”: this document will walk you through a series of questions to get you ready to apply for a business loan.
Public Financing Options
Five Public Financing Programs that Work
Many financial assistance programs at the state and federal levels will not work for small meat processors. If we had a dollar for every program out there that we were told could help small meat processors, well... we could buy a lot of bratwurst. While assistance programs do change from time to time, the five programs listed below are the only ones we found that work reliably for small meat processors.
1) Tax Increment Financing (TIF)
This program allows local area governments to provide loans and grants to, or make accommodating infrastructure improvements for, local businesses up to the amount of increased tax revenue expected over 10-20 years resulting from commercial/industrial building or expansion. Meat plants receive these funds by requesting them from, and entirely at the discretion of, local city councils and mayors. Some plants have received tens of thousands of dollars through TIF. These funds have been used both indirectly towards accommodating town infrastructure and directly towards construction costs.
- Further Information: CDFA TIF Resource Library
- Contact Information: Contact your local township and/or county
2) Tax Abatement
Separate from TIF, counties and towns can agree to abate taxes for a new or expanding business. This too is entirely at the discretion of the local council members or county supervisors. It generally helps to have good projections about your business’ economic impact and good standing in the community. The bottom line is: if you don’t ask, you won’t get anything.
- Contact Information: Contact your local township and/or county
3) The Rural Economic Development Loan and Grant (“Red Leg”)
A significant number of small meat lockers have been built or renovated over the years with these funds. The program is in essence a zero percent interest loan for 10 years, but the loan can only be accessed through a local rural electrical or telephone cooperative. Through a lien on its own assets, the co-op applies to borrow money from the federal government for the sub-applicant business. If the application is successful, the co-op passes the money on to the sub-applicant business.
The maximum loan amount is presently $750,000. Successful applicants typically only finance between 5 and 17 percent of a project with this type of loan and never more than 50 percent, according to the Iowa Area Development Group. Applications from businesses in communities of fewer than 2,500 people are more favorably considered. The co-op can charge up to 1% per year to cover its own administrative costs. Rather unusually and usefully, payment on principal may be deferred for up to a year for an existing business and up to two years for a new business. You must apply for this program through your local Rural Electrical or Telephone Co-op.
- Contact Information: Contact your local rural electric and/or telephone co-op
4) Rural Energy for America Program (REAP) aka Section 9007 of the Farm Bill
This program only applies to existing plants. You must have an existing facility or equipment that you are making more energy efficient in order to qualify for a grant, and grants can only cover up to 25% of the cost of the eligible portions of renovation. For renovations over $200,000, a feasibility study is required and detailed business financial need must be demonstrated. The kind of Feasibility Study needed for this grant can cost up to $30,000, and it can be difficult to “prove” financial need when there is someone who will likely loan you the money. Discussions with USDA about this issue revealed it to be a rather “gray” area. $50,000 appears to be a realistic grant cap for this program.
A tip: Grant monies can only be spent once, but loan guarantee funds can be used over and over again. So, Congress encourages the USDA to push the loan guarantee portion of the program. If a company applies for only a grant, the application is held and judged once annually at the national level with all of the other applications. But if a company applies for a grant and a loan guarantee, the decision to allocate funds can be made at the local level, and in a rapid manner to assure that the loan guarantee funds are used. A company is virtually assured a grant if all of their paperwork is in order and if funds are available when they apply for both a grant and a loan guarantee.
Every application will need a professional energy audit. Contact your local electrical service provider to see if they can either perform such an audit or recommend someone else in your area.
- Contact information: USDA Rural Development
5) The Small Business Administration’s (SBA) Certified Development Corporation (“504”) Loan Program
Commonly referred to as “504 Loans,” this program provides partially-subsidized and guaranteed loans. Your local lender covers up to 50% of project costs, SBA covers up to 40%, and you must put in at least 10%. The local bank is put in a senior collateral position, which means that if you default on the loan, the bank collects on collateral up to the amount you owe them before the SBA. The SBA portion of the loan is usually below market rate, and the local bank is generally happy to be in a senior collateral position with only 50% of the investment.
The loan can be amortized over 10 or 20 years, but the fees associated with the loan that equal 3 percent of the SBA portion are a drawback. Three percent of $500,000 is $15,000. While this amount is probably not a deal breaker, it is something worth weighing before enrolling in the program. If the offset on SBA interest vs. the market rate is significant, then it works out well. This reiterates the need for locker owner-operators to develop a firm understanding of their financials. To access this loan program, you will need to work with your lender and an SBDC.
- Contact Information: U.S. Small Business Administration- CDC/504 Program
USDA Rural Development Programs for Local Food Initiatives
USDA's Rural Development program has 40 loan and grant programs, and of these, 12 can be used to support local food initiatives. This short (7 slides) presentation, given by USDA Rural Development Deputy Undersecretary Cheryl Cook, January 20, 2010, as part of a USDA-FSIS webinar on mobile slaughter units, explains the basics of these programs. Click here for the presentation.
Other Loan Guarantee Programs
While a guarantee may be necessary under certain circumstances and can sometimes get you better loan terms (related to repayment period or interest rate) depending on the bank, often they have up front costs of 1 - 3.5% of the portion guaranteed and have annual fees ranging from 1/8th to 1/4th of a percent on the remaining loan balance. The guarantees may also come with high administrative costs due to extensive reporting requirements. In short, these guarantees can have varying cost-to-benefit ratios and should be thoroughly scrutinized based on your particular circumstances. Make sure to ask for a full breakdown of all associated initial and annual fees.
USDA Rural Development Business and Industry Loan Guarantee Program: This program can guarantee up to 80% of a bank loan, depending on loan purpose. A USDA Rural Development feasibility study is required for a start-up business, a renewable energy project, an existing business without a profitable history, or an existing business planning to develop an independent operation in a new location. USDA decides on a case by case basis, during the pre-application process, whether to require a feasibility study.
- More Information: USDA Rural Development, Business, and Cooperative Programs
- Contact Information: USDA State Offices
SBA Loan Guarantee Program [7(a) loans]: you must work through your bank to apply for this type of guarantee. Up to 85% of loans of up to $150,000 and up to 75% of loans above $150,000 can be guaranteed for up to 25 years.
- Further Information: SBA 7(a) Loan Program
- Contact Information: SBA Local Resources
Impact Investors
The growth of local food systems has led to increased interest by “impact investors.” Impact investing is investment based, in part, on the investor's support for certain social or environmental issues. Impact investors are more likely to invest in alternative energy like solar or wind and less likely to invest in coal mining. Impact investing can sometimes work for meat processing facilities, if you can demonstrate that your business supports the social or environmental goals of the investor.
Two examples:
- RSF Social Finance (funding in the U.S. and Canada) describes their investment approach as "dedicated to the development of healthy food systems as a foundation for more vibrant and resilient regional economies." RSF loans range from $200,000 to $3 million, with interest rates typically between 5 and 8%. RSF requires strong collateral, excellent repayment history, experience (3+ years of operating history), current profitability or a path to it within 12 months, and revenues of at least $1 million.
- Fair Food Fund (focused on the Northeast U.S.) aims to support businesses that get more local, sustainably grown food to market, to build "a robust regional food infrastructure... to support the long-term viability of small and mid-scale farms," and increase access to healthy food in underserved communities.
Economic development organizations, business incubators, local government and non-profits in your area should be able to help you find other impact investors.
Financing in Action: Real Stories from Real Plants
Livestock Producers Cooperative Association
The Livestock Processors Cooperative Association (LPCA) was formed in 2012 to “sustain, improve, and protect Washington State’s cattle industry.” To support Washington producers in accessing local markets, the LPCA opened the doors in September 2013 on their new, multi-species USDA-inspected processing facility. They used several different financing options to fund this plant, demonstrating how public and private monies can be used to build new plants (or upgrade existing ones).
The LPCA secured funding for their approximately 8,200 sq. ft. processing plant from 5 primary sources:
- Community Economic Revitalization Board (CERB) Loan from Washington State: $1.2 mil., interest free for 5 yrs. after that the interest rate will be 5%.
- Member contributions: each member contributed $600 and receives a discount on their processing in return. LPCA processes for both members and non-members.
- Craft3 Small Business Credit Initiative Loan: line of credit for $300,000 to purchase “processing line equipment, fixtures and holding pens” and cover some start-up costs.
- Private investors: approximately $645,000 at 8% interest, unsecured debt.
The plant, which cost approximately $2.2 million to build, has the capacity to process 20 head of cattle per day (or the equivalent in hogs, lambs and goats).
Raise More Money Than You Think You Need
Willard Wolf, LPCA board president, cautions anyone interested in building a new plant to be prepared for cost overruns, delays, construction errors and changing regulations. As the LPCA moved through the process of planning for their plant, construction and opening day, costs often changed as well as what was allowed or not allowed, per the 17 different county, state and federal entities overseeing the construction and opening of the plant.
For example, because LPCA used public funds they had to pay prevailing wage for all the construction labor, which ended up costing about 20% more. In another instance, between December 2012 and January 2013, the site preparation plans and testing requirements all had to be redone because the regulations changed with the new year. This set them back several weeks and cost an additional $120,000 to meet all the new requirements.
“You can have ‘actual’ facts and figures as to what is supposed to happen, but that doesn’t mean it will stay that way,” says Wolf. Make room in your budget for unforeseen costs: there are constant setbacks and changes. In the end, LPCA estimated that their cost overruns were approximately $240,000 or over 10% of their total building cost.
Vermont Smoke & Cure
Vermont Smoke and Cure in Hinesburg, Vermont is a USDA inspected meat processor and butcher shop. They make sausages, bacons, hams, and other smoked meats, which are distributed throughout New England to natural-foods stores and supermarkets.
