There are many financing options available in the food and forestry system, although it can be difficult and overwhelming to distinguish which type of financing fits the needs of your enterprise.
The Capital Continuum located in the Farm to Plate Strategic Plan by the Vermont Sustainable Jobs Fund, illustrates the entire realm of financing available. Below is a brief overview:
Debt: The amount of money borrowed by one party from another. A debt arrange-
ment gives the borrowing party permission to borrow money under the condition that it is to be paid back at a later date, usually with interest.
Mezzanine or near equity financing: A hybrid of debt and equity financing that is
typically used to finance the expansion of existing businesses. This financing option
can include such instruments as subordinated debt, convertible debt, warrants, royalty financing, or some combination of these instruments.
Subordinated debt: A loan (or security) that ranks below other loans (or securities) with regard to claims on assets or earnings. In the case of default, creditors with sub- ordinated debt do not get paid out until after the senior debt holders have been paid in full. Therefore, subordinated debt is riskier than unsubordinated debt.
Royalty financing: This type of financing is not readily available in Vermont. It is based
on a company’s selling a piece of gross revenue instead of selling ownership—hence it’s often called “near equity.” In exchange for a loan, the company gives the investor a
percentage of sales until the investor has received back principal plus additional interest negotiated with the investor.
Convertible debt: Instruments that are essentially asset-backed loans that can require the business owner to give up some future equity (ownership) in the business if the lender wishes to convert the debt to an equity position in the company.
Equity financing: The act of raising money for company activities by selling common or preferred stock to individual or institutional investors. In return for money paid, shareholders receive ownership interests in the corporation.
Grants: A contribution, gift, or subsidy (in cash or kind) bestowed by a government or other organization for specified purposes to an eligible recipient. Grants are usually conditional upon certain qualifications as to the use, maintenance of specified standards, or a proportional contribution by the grantee or other grantor(s).
Program-related investments (PRIs): Investments made by foundations to support charitable activities that involve the potential return of capital within an established time frame. PRIs include financing methods such as loans, loan guarantees, and even equity investments in charitable organizations or in commercial ventures for charitable purposes.