Loans can be a major source of capital for your business. A loan’s terms and conditions are often tied to a variety of factors, such as the viability of the business model, management experience and financial outlook. Generally speaking, start-up businesses are considered riskier than those that have been operating a while.
Deciding if and when loan financing is right for your business can be a tough call. Before approaching a lender, you need to understand some of the key factors that will be used to evaluate your credit application.
- Credit history: How has the business owner managed previous credit?
- Ability to repay: Is the business profitable, and does it have positive cash flow?
- Capital: Does the business owner have enough investment of personal capital in the business?
- Collateral: Does the business owner have assets that can be used as collateral to secure a lender’s investment?
- Business experience: Does the business owner have extensive experience in the industry?
A lender will evaluate whether a potential borrower is eligible to receive a loan based upon the business's cash flow projections. Lenders take several factors into consideration when evaluating risk: your business plan and market studies, management capability and experience, cash flow, and collateral.
Loans can typically be used for the following expenses.
- Leasehold improvement
- Energy efficiency improvements
- Equipment loans and equipment leasing
- Working capital
- Permanent financing
In addition to the federal Healthy Food Financing Initiative, the federal government offers several loan guarantee programs and a small number of direct loan programs. Federal loan guarantees encourage lenders (in most cases, banks) to make loans in sectors or areas perceived to have higher risks. Although the federal government guarantees the loans, local and national banks originate and service the loans.
Examples of loan and loan guarantee programs that are relevant to healthy food projects are listed below.
- USDA Community Facilities Direct Loan and Grant Program: Offers loans and loan guarantees to develop essential community facilities and services for public use in rural areas, including farmers markets and refrigerated trucks.
- USDA Business and Industry LOan Guarantees (B&I): Guarantees loans for up to $10 million for economic development and/or environmental projects in rural communities for a wide range of purposes, including healthy food business enterprises like grocery stores and food hubs.
- Small Business Administration (SBA) 7(a) Loan Program: Offers up to 90 percent loan value guarantees for small businesses. The program backs loans of up to $2 million with a payback period of seven to 25 years, a longer term than most standard bank loans.
- Small Business Administration (SBA) CDC/504 Loan Program: Provides long-term, fixed-rate financing for small businesses that will help create new employment opportunities or retain existing jobs. These loans are made through the SBA's community-based partners, Certified Development Companies.
State and Local
Dozens of state and local initiatives, many of which are managed by CDFIs, offer financing and other incentives to encourage the development, expansion, and preservation of healthy food businesses. If your healthy food business enterprise is located in a community that has one of these state or local initiatives, you may have a one-stop shop for the financial resources you need to make your project a reality.
In addition, most states and municipalities have economic development agencies and authorities whose mission it is to promote business development and job creation by offering businesses low-cost loans, grants, loan guarantees, or tax-exempt bond financing. Check your state and local economic development departments, agencies, and authorities to learn about loan opportunities and other incentives that can help finance your business concept.
The U.S. Department of Treasury CDFI Fund has certified nearly 1,000 organizations as CDFIs. CDFIs are mission-driven lenders that work in economically distressed communities underserved by conventional financial institutions and capital markets. CDFIs deliver a unique range of financial products and services. Many offer lower interest rates and more flexible loan terms than traditional banks. CDFIs have taken the lead across the country in providing financing for healthy food retail and food system development.
Nearly two dozen CDFIs manage state and local healthy food financing initiatives that offer financial products to businesses working to improve access to healthy food in underserved communities. Contacting a CDFI that is a federal HFFI grant recipient or manager of a state or local initiative is a great starting place in your search for funding. Even those CDFIs who do not have a dedicated funding source for healthy food projects may be interested in financing your work. Learn about state and local healthy food financing initiatives.
Credit unions and banks, especially regional banks, community development banks, and banks participating in SBA’s loan guarantee programs, are another option for financing a healthy food business. Bank loans can be difficult to obtain for start-ups or projects serving low-income communities. Banks usually require a borrower to have strong personal or business credit scores and financials. You may also have to provide collateral or a personal guarantee to secure the loan.
Credit unions offer their members personal and/or business loans and other financial benefits at competitive or cheaper rates than banks. Credit unions are cooperatively owned, regulated, and insured depository financial institutions, ranging in size from small, volunteer-only operations to large, complex organizations with significant capital assets. Community-development credit union and banks, which are also Treasury-certified CDFIs, specialize in serving low-income communities and populations with limited access to safe financial services. Visit the Community Development Bankers Association and National Federation of Community Development Credit Unions websites for more information about these financial institutions.