The owners of a family farming operation were evaluating their business, as they had grown dissatisfied with the return on investment from their traditional farming operation. They felt that for a similar investment in another type of business, they could realize a much higher return on their capital.
They decided they should focus their efforts on an industry they already understood – agriculture. But, instead of expanding their traditional row crop operations, they decided processing their oilseed crops would offer a higher return on their investment and greater stability of income. The family researched their options and decided that investing in a non-GMO oilseed processing facility offered the best opportunity to have a successful business.
VITAL subscribes to a variety of proprietary data and analytics databases that allow us to gain deeper industry insights. Research showed that owners of these types of businesses realized compensation that put them into the top 4% of working Americans. EBITDA from these same businesses averaged 5% of annual sales, after accounting for the owners’ salary. The average annual sales for the 403 similar companies contained in the NAICS database were slightly more than $6,000,000. With this information, the family decided to move forward with the project.
The total project was $1,200,000, which consisted mainly of non-real estate expenditures. The capital investment required from the family was a minimum of 10%, or $120,000, which was the maximum cash injection they were able to provide.
The lender’s dilemma was that the borrowers had never run a manufacturing facility before, and manufacturing is a complex industry. But, the lender knew the borrowers personally, and had a great deal of confidence in their management ability. The lender decided to move forward with the opportunity by enlisting the aid of a guarantee from the Small Business Administration to mitigate potential risks.
It was a win-win proposition. Helping the borrower invest in improving their business' financial performance was good for the bank too. The bank sold the guaranteed portion of the SBA loan – $900,000 – and realized a gross premium of $99,000. The bank charged a 1% higher interest rate on the unguaranteed portion of the SBA loan than on similar-sized non-SBA loans, thereby increasing interest income. After collecting the premium and interest income and paying expenses, the bank realized a 31% return on its $300,000 net loan.
The business is operating well and both the borrower and lender are satisfied customers.