An established firm can look to its financial history to provide some of the evidence which will require. The firm’s balance sheet and earning statement provide a record of the firm’s progress and its current strength and weaknesses.
The lender is going to expect this information he is going to be even more concerned with answers to the following question:
- How much does the firm need to borrow?
- Is the borrowing for seasonal and/or long – term purpose?
- If the borrowing is for seasonal requirement, can the firm project enough cash flow to repay the loan within the year?
- If the borrowing is for long – term purposes, what type of assets are to be purchased?
- Will fixed assets which will be financed by the loan generate enough profits to repay the loan?
- What will the firm’s debt/net worth position be after the loan is made? (Alternative, will this loan push the firm’s debt/net worth position beyond a level which is acceptable to the lender?)
A newly formed firm will need to answer the question listed. It should, in addition be ready to provide information on management which will be in charge of the proposed operation. A great deal of paper work will be required to support a loan request. A feasibility study which documents the potential profitability of the proposed project is a starting point for any request for long–term funds. Balance sheets and earning statement for recent years will be needed. A loan application will be filled out to start the loan process. A credit report will be used to update the firm’s present loan situation. Depending upon the nature and the size of the loan request, more detailed information may be required by the lender.
Acquiring and analyzing loans
Budget and forecasts of future operation will provide the lender with evidence of the borrower’s ability to make effective use of the funds requested. Again upon the complexity and size of the operation, a lender may require the following information:
- Cash budgets
- Sales and margin forecasts
- Accounts receivable forecasts
- Service income forecasts
- operation expense forecasts
- Flow of fund forecasts
- Operating budgets
- Expense budgets
Loan terms and conditions
- Length of Loan
The length of loans should be limited to the economic life of an asset. For seasonal loans, this means repayment when the inventory being financed is sold. For building and equipment, the economic life will approximate the period over which the item may be depreciated. If a fixed asset is financed for too short a period there may not be sufficient cash flow to meet loan obligations. Lender do not wish to finance for longer than the economic life because an asset which cannot be paid for within its economic life is probably a poor investment for the borrower and poor collateral for the lender.
- Interest Rates
Interest rate which an agribusiness firm pays for the use of money will vary with condition in the money markets. Loan from bank may have interest charge which change with change in market rates. Loans from other lender may be set at the beginning of the loan and continue at that rate throughout the period of the loan. A second factor which will affect the rate of the interest which an agribusiness firm must pay for loan funds is the risk which the lender place on the loan. The more risk perceived by the lender, the higher the rate may be.
- Repayment Plans
Lenders who are financing seasonal inventory may expect repayment of the loan as inventory is reduced and collection is made. Interest may be billed on a monthly or quarterly basis for the average outstanding balance during the period. For other borrowing, an installment payback may be scheduled or a lump sum payment at the end of the period maybe required. The lump sum payment may include interest, or interest might be billed separately at intervals throughout the life of the loan. When an installment program is used, the repayment may require even principal payment an equal payment program may be established. An even principal payment plan specifies that cash principal payment is the same each period. Since interest charges are based on out standing balance the interest portion of each payment is lower as the loan is repaid. An even payment plan requires the same total payment each period. The amount of the payment is divided between interest and principal. Interest on the outstanding balance is determined first. Calculation of the amount which must be repaid each period can be done very easily with the assistance of an annuity table.
- Collateral Required
A lender may obtain security interest in inventory or in equipment by inspecting public records to assure there is no prior claim on assets and then filing a financial statement in the appropriate country and/or state offices. For real estate loan, the lender will file a mortgage (deed of trust in some states ) in the country in which the property is located. This serves notice to other creditor that prior claim on the identified property belong to the party which filed first.
- Restriction on Borrowing
Lender typically do not like “split line of credit.” A split line of credit exists when borrowers use two or more sources of financing. When one creditor is supplying all of a firm’s credit need there is less chance that the borrower will overextend himself. There is also less potential for problems with the collateral which is used to secure a loan. An agribusiness firm which requires debt money beyond the level which a lender consider prudent may have to accept some restrictions imposed by the lender. The alternative may be to not obtain a required loan or to not obtain an extension on an existing loan. Restrictions which might be imposed include the following:
- That no additional debt be obtained.
- That no divided or patronage refunds be made until the financial condition of the firm improves to specified levels
- That additional equity capital must be contributed by the owners
- That certain type of borrower activity be eliminated or that certain new activity not started