Leopold Center for Sustainable Agriculture

Study looks at critical need for capital among niche farm businesses

Back to Leopold Letter Summer 2008

Once upon a time there were three entrepreneurs, each with a product and plan to sell it. The first one built hand-crafted canoes, the second one wanted to open a coffee house on Main Street, and the third raised grass-finished organic beef.

Which entrepreneur would have the most difficulty finding financial assistance?

Without a doubt, it would be the farmer, says Howard Van Auken, professor of management in the Iowa State University College of Business.

Unless a local bank is willing to offer the farmer a personal loan, the farmer may have few avenues for accessing potential sources of capital. It's a widespread problem for niche producers, Van Auken discovered as part of a recent research project conducted for the Leopold Center's Marketing and Food Systems Initiative. In fact, findings showed that many of the startup costs associated with specialized agricultural operations may be charged to personal credit cards.

"Who is helping niche producers understand the process for accessing potential capital? The answer is almost no one," Van Auken said. "If I want to open a new retail business, I go to a bank because banks understand retail. If I have a new technology, or want to open a manufacturing facility, there's a process to follow. But if I'm an organic honey producer, I'm out of luck."

The project included two surveys. He mailed questionnaires to 138 organizations, potential providers of capital to niche agriculture producers in Iowa such as Farm Credit Services, RC&Ds, rural development funds, Community Development Finance Institutions, U.S. Department of Agriculture offices, rural electric cooperatives, councils of government and revolving loan fund organizations. He also mailed questionnaires to 693 niche agricultural producers in Iowa, including owners of food and fiber enterprises.

Among providers of capital, he found:

  1. Funding rejections are primarily due to lack of collateral, a weak or nonexistent business plan, or the applicant did not meet the criteria needed to receive funding.
  2. Two ways to improve the flow of capital to producers would be to provide more technical assistance and to have more capital available to the agency for dispersing to applicants.
  3. Little technical assistance is provided to applicants. The flow of capital is restricted because information dissemination appears to be limited.
  4. Few, if any, applicants have a comprehensive understanding of capital availability (e.g., who does what in the process). Advertising of capital availability, done primarily through economic development agencies, word of mouth, and banks, likely does not reach many producers.

Producers who responded to the survey provided information on their situations regarding capital acquisition. He learned that:

  1. Producers are most aware of capital available from the USDA, friends and family, community banks, and savings and are not familiar with other potential sources.
  2. Producers obtain capital primarily from sources that are familiar to them.
  3. Community banks are the most common source of technical assistance while few other agencies are called upon for technical assistance.

Ways to access financial and planning services, referred to as a "money map," are commonly outlined in business sectors. Van Auken had hoped to create a similar money map for niche ag producers, showing them how to access potential sources of capital and technical assistance for creating a business plan, marketing strategies and contingency plans.

"I found it very frustrating because there is no formal or informal process and agencies did not seem to know what others were doing in this area," he said. ""I'm not even sure I know the paths that farmers should take to get the information they need to start a niche business other than personal contacts, community banks and research on the Internet."

Results have been shared with the Iowa Microloan Foundation and other groups that might be able to provide assistance in this area.

 

Back to Leopold Letter Summer 2008