Drew Tulchin talks about how to finance green businesses in the U.S. in terms of capital options and sources. He gives step by step practical advice for green entrepreneurs and suggests various things that can be done to help obtain financing.
by Drew Tulchin, Managing Partner of Social Enterprise Associates. Connect with Drew on Linkedin
Green business is where most look for the greatest growth in America in the near future. Given the current economy, it is needed as soon as possible. Many home-based businesses and start ups, environmental or not, often lack a major green element—money.
[See Why Can’t Cleantech Companies Get Funded When There is Plenty of Capital for Them] Ensuring a green entrepreneur has a successful idea, the financing to launch, and then the cash flow to continue his or her enterprise is a vital necessity.
Ensure The Business Idea Will Work
Having a good idea and a strong plan are initial steps. Many support institutions throughout the United States help small businesses of all kinds. The U.S. Small Business Development Center, SCORE, Launchpad LA, Green For All, the Business Accelerator for Sustainable Entrepreneurship, and the Clean Technology Resource Center are just a few offering training, mentors and other services.
Finding a supportive community is a good step toward building a green business. Business networks to tap include:
Clean Economy Network – The Clean Economy Network (CEN) is a national membership-based networking, educational, and advocacy organization working to shape a new economy based on clean technology and innovation.
EcoTuesday– EcoTuesday is a structured networking event for sustainable business leaders that takes place on the fourth Tuesday of each month in cities across the country;
Green Chamber of Commerce – The Green Chamber of Commerce is a growing and diverse national business network with members across the US.
Green Drinks – Green Drinks which provide local informal networking opportunities for people from NGOs, academia, government and business who work in the environmental field.
Meetups – Meetup is the world’s largest network of local groups, working to revitalize local community and help people around the world self-organize. There are thousands of groups organized around cleantech, green business, the environment, climate, green entrepreneurship, renewable energy, sustainability, new urbanism & sustainable development, green technology, as well as other interest areas.
Considering Capital Options
Securing capital is challenging for start-ups in general and green businesses in particular. Managing expectations is an important first consideration. Equity risk investors are rare options unless the business can grow very fast (like five or ten times). Grants are usually reserved for nonprofit charities. There are exceptions, particularly for businesses in rural areas, minority/women/veteran owned, or offering specialty niche technologies. “Our local office has to send Washington back millions of dollars in funding that goes unclaimed each year,” says Terry Brunner of the NM USDA. “We are always looking for
appropriate matches for projects.” It is worth seeking help from that government agency or others who have done it successfully, as grants can be challenging to navigate.
Explore Traditional Financing Options
Local banks are still a viable option. They often offer good pricing. “There is a gap in perception. People are hearing banks aren’t lending, period,” says Alan Austin of New Mexico Bank & Trust. “I hear people say that, and I tell them that isn’t correct.” To make a loan, bankers need specific ways to assure they will get paid back. “People who care about the environment don’t always trust or feel they share the same values as financial professionals,” says triple bottom line business consultant Nicole Cowing Woosley.
These are available through banks and micro-lenders. The following are a few examples:
Coastal Enterprises specializes in triple bottom line investing in ventures that result in a positive impact on the natural environment by reducing energy use, waste, pollution or material use, or by improving stewardship of natural resources. The bank’s social investing targets sustainably managed ventures in the farm, fish and forest sectors, women business owners, microenterprises. CEI Ventures, Inc. manages socially responsible venture capital funds.
Credit unions are another option that is often overlloked. The Permaculture Credit Union pools the financial resources of people who believe in the ethics of Permaculture — care of the earth, care of people, and reinvestment of surplus for the betterment of both. The credit union applies those resources to earth-friendly and socially responsible loans and investments. They also offer loan discounts for fuel-efficient automobiles. Permaculture Credit Union also supports energy conservation through second mortgage loans that encourage solar heating, photovoltaic energy systems, building weatherization, rainwater collection, natural resource conservation, organic farming and gardening, etc.
The credit union serves the following types of businesses: manufacturers, wholesalers, and retailers of recycled goods;producers, wholesalers, and retailers of sustainable agriculture and forestry products; manufacturers, wholesalers, retailers, and installers of renewable energy and environmental technology; organizations incorporating energy efficient or “green” components in their facilities; businesses and nonprofits offering sustainable services; land conservation organizations; and businesses and nonprofits located in “Smart Growth” areas, such as downtowns.
Vermont Community Loan Fund provides access to capital for the development of affordable housing, community facilities and organizations, and local businesses. The organization has received awards for its green lending.
Opportunity Fund – Opportunity Fund is a nonprofit that specializes in microfinance—the provision of small loans and credit to small businesses and entrepreneurs who lack access to traditional banking and related services. They go out of their way to support green business. There are a growing number of these organizations seeking to work with green businesses.
Historically, low-wealth communities have been disproportionately affected by poor environmental quality, high-energy prices, and unhealthy land use policies. The Self-Help Credit Union Sustainable Development Lending initiative is designed to protect the interests of its borrowers and to help reverse these negative trends. Self-Help has financial products tailored to the borrower’s needs, whether you’re a micro-business needing a few thousand dollars, or an established business seeking funds of a million dollars or more.
One PacificCoast Bank invests key sectors that are indigenous to the geographic regions in which the bank operates and important for creating sustainable communities. The bank’s lending sectors include: specialty agriculture (including processing), renewable energy, and green building. For each lending sector, the bank promotes efficiency in energy and materials use, as well as focuses on businesses that promote vital, healthy communities.
The People’s United Bank Socially Responsible Banking (SRB) Program facilitates positive change in our local communities by providing an important source of lending capital. The bank facilitates change by building a base of deposit funds that will specifically support community lending efforts in five areas: agriculture, energy/environment, housing, non-profit organizations/education, and community businesses.
Access to Capital for Entrepreneurs, Inc Georgia Green Loans – With a Georgia Green Loan, small businesses can start or expand an eco-friendly product or service or “green” an existing business. Georgia Green Loans are available in amounts from $500 to $35,000
Don’t Rule Out Alternative Financing Sources
There are more financing sources suited for green ideas, which accept varying levels of risk. Caveat emptor for all of these – buyer beware. Read the fine print. Investors include family and friends. They can use services which help formalize a loan or equity agreement in a professional way so all parties have the same expectations. One example is Virgin Money.
Credit Cards allow small business owners to use personal credit to finance. America has the highest per capita consumer debt in the world. Credit card companies are becoming stricter as defaults and late pays are increasing. Deals still exist with low introductory rates, transfer offers, and inexpensive cards. Mismanagement of credit cards leads to high interest rates, cautions
Finance New Mexico, is another helpful local resource. They make small business loans to those not yet “bankable.” Each offers slightly different services and loan conditions. Again, it is still a loan that must be repaid.
Peer-to-peer and social loan networks are like eBay for lending. www.prosper.com and www.lendingclub.com, among others, connect people directly to borrow and lend money online,
with lenders taking parts of loans.
Accounts Receivable Financing, also called factoring is another option that many business consider. With factoring, a business sells its invoices or contracts at a discount based on the risk and time to collect payment, receiving immediate cash for those accounts receivable. Factoring increases working capital and cash flow, but at a cost. This is a regularly offered service but can be expensive, so figure out the percentages.
Barter or trading goods and services for noncash is another potential option. It is a much older version of ‘sales.’ It works better when you want what the other can offer. If a ready trade is not clear, ask. A solution might present itself that wasn’t obvious on the surface. There are a number of business bartering web sites on the Internet. A few of the more popular ones are: Itex, Recipco and Barter Systems Incorporated.
Approaching a Financial Institution
Many green entrepreneurs have experience in the nuts and bolts of business operations and know that language well. They are often less familiar with banker-speak like “value proposition,” “net income” and “profitability.” Securing financing requires an understanding of bankers and financiers. Entrepreneurs
should consider not only banking buzzwords but also what bankers value. What bankers see when looking at a green start-up is different than what an entrepreneur communicates. A financial professional needs to document how he/she will get their money back. Loan package materials should make it easy to understand how the business can repay a loan, what collateral is available and other assurances.
Consider your strategy to seek a loan:
- Know your credit score—personal and business
- Use an accounting system and monitor cash flow
- Know your banker by first name
- Build a long-term relationship—start small and build over time
- Credit score is important. For many small businesses, the lender regards it as an extension of the individuals involved. Owners or guarantors need to know their finances. Their credit challenges will reflect on the business. Establishing credit is part of what a bank sees as “Character.”
- Securing financing can be a significant hurdle for a small business or entrepreneur to overcome,
but it is a crucial step in the process of translating green ideas into meaningful businesses.
What Do Banks Look For?
Banks seek to minimize risk of loan repayment. They look for the “6 C’s of Credit”:
Capacity to repay is the most important factor. A bank will not lend to a business if they are worried the business will not be able to repay the loan.
Credit Score is a major indicator. Business profitability – typically indicated by cash flow or profit/loss – is important, and shown by good financial statements.
Capital includes what the entrepreneur has personally invested in the business. Personal investment increases motivation for the business’ success, and should be clear from financial statements as well as in conversations.
Collateral or guarantees include equipment, buildings, inventory, or other physical items that could be sold. Cars, for example, must be owned free and clear. They may only be valued at 50% of blue book,
due to the process of selling them. The US SBA offers guarantees and has increased its levels due to the economic crisis.
Conditions are the reasons for the loan, such as opening a new store, purchasing new equipment, or launching a marketing campaign. Conditions in the business plan should show how the money spent will lead to increase business profitability.
Character speaks to how trustworthy the business and managers are. Experience, education and industry connections / relationships all communicate elements of character. They should be included in biographical summaries.
