An agricultural lender posed the following question concerning a young farmer who is financially stressed, “My customer has an idea for an income producing opportunity with an excellent business plan. Would you finance this gig and what conditions would you apply to this situation?” This situation sounds a bit like the popular business show Shark Tank on CNBC.
First, it is a positive sign that the producer invested time in developing a business plan. I often tell lenders that if someone has an idea without a written plan that the risk coefficient quickly increases. Second, was the business plan developed by the owner or by a professional consultant? It is critical that the producer has skin in the game and thought through the process.
A second factor to consider is whether this money-making opportunity is complementary or competitive with the existing business. It is advantageous if existing resources can be used to lower the fixed cost of production.
Another consideration is time management. Will there be enough energy to execute the plan or the new gig? Will the new enterprise drain existing capital, time, and land resources?
With any new venture, one has to consider the time to market analysis. Will the new business produce recurring income or a one-time shot? Businesses that do not immediately generate a positive net income become a detriment to existing financials, often draining working capital from the existing company to the new venture.
Finally, are the human resources and management in place to make this new business a positive outcome? Side ventures often require 25 percent more time and capital to be successful.
If this lender does commit to lending funds for a new venture, then a strategy of close monitoring through variance analysis is critical. Comparing actual results to monthly or quarterly cash flows and income statements is a necessary strategy to manage risk from both the banker’s and producer’s standpoint.
P.S. I suggest that the producer and lender closely examine why the current situation is financially stressed. In some cases, poor management can be carried over into the new venture. This introspective analysis of existing businesses needs to be conducted in the business plan before the new gig is considered.
Also, is the new venture legal? I uncovered some interesting business opportunities during this winter’s speaking circuit that I would rather not mention. To give you a hint, a good movie to watch is The Mule starring Clint Eastwood.