Financing Issues for Small and Beginning Farmers

1
Financing Issues for Small and Beginning Farmers

• Cesar L. Escalante
• University of Georgia
• TAG Workshop for Small, Beginning and Limited
  Resource, Statesboro, GA, April 29, 2004

2
OUTLINE

• Financing Opportunities
• Potential Suppliers of Funds
• Credit Risk
• Loan Negotiations
• Knowing whats most appropriate
• Negotiating for best available (affordable) loan
  terms

3
Potential Lenders

• Traditional Ag Lenders
• Farm Credit System
• Community Banks
• Non-traditional Sources of financing
• Input suppliers (eg. John Deere)
• Equity investments from venture capital
  corporations
• Farmland and equipment leasing
• Last Resort Government agency (FSA)

4
SPECIAL LENDING PROGRAMS

• Are there really special programs for you?
• Lenders Concern CREDIT RISK
• The ability of borrower (and business project) to
  repay the loan

5
The Non-Conventional FSA Lending Framework

• ELIGIBILITY
• guidelines
• plus
• CREDITWORTHINESS Criteria

6
FSAs Creditworthiness Criteria

• Character, industry, and ability to carry out the
  proposed business plan
• Realistic repayment plans
• Nonpayment of debts or delinquent payments due to
  circumstances within an applicants control
• Falsification of information, intentional
  omission of important loan information, and
  evidence of lack of reasonable effort to comply
  with loan conditions and terms

7

• Special considerations
• Non-delinquent status non-payment of debts or
  delinquent payments due to temporary
  circumstances beyond borrowers control such as
  job loss, loss of benefits or other income, and
  increase of living expenses due to illness,
  injury, or death
• Nonexistence of credit history could not
  constitute unacceptable credit history

8
HOW RISKY ARE YOU?

• Who are you?
• Repayment Ability
• Farm and non-farm sources of income
• Leverage and Collateral
• Debt to asset ratio
• Collateral coverage ratio

9

• Track Record
• Credit History
• Payments on time?
• Balances
• Credit Limits
• Inquiries on your account
• Courthouse Files
• Supplier References

10
Improving Your Credit Risk Rating

• Good Consumer Credit
• Repercussions of even the smallest historical
  (credit card) transaction could be enormous.
• Whole Picture Perspective your farm business
  project and YOU
• Family Living spending patterns?
• Reasonable Project Size
• Starting small to establish a track record

11

• Viable Project
• Afford costs of first-time credit
• Relatively higher borrowing costs
• Shorter loan maturities
• Guaranteed Loans
• Paying extra fee
• Guarantors
• FSA Beginning Farmers and Ranchers Program
• Georgia Development Authority Insured Loan
  Program

12
THE TERMS OF YOUR LOAN

• PRICE
• Fixation on interest rates
• NON-PRICE
• Common Oversight

13
How is your interest rate determined?

• Your Credit Risk Rating
• Loan Size
• Loan Maturity
• Fixed versus Variable
• Deposit Relationships
• Lending Competition

14
Non-Pricing Terms

• Loan Amount
• Loan Maturity
• Payment Arrangement

15
LIQUIDITY

• Having money when you need it!
• NO Negative Net Cash flows!!!

16

• Expecting to earn a profit does not always
  guarantee youll have money when you need it!!!

17
LOAN AMOUNT

• PROBLEM Approved Loan is Less Than
• Amount Requested
• Other sources of funds?
• Will it hurt project to go on with less funds
  available?

18
LOAN MATURITY

• PROBLEM Approved loan maturity is
• shorter than requested
• The shorter the maturity, the larger your regular
  loan payments will become!!!
• Whats proper?
• Short-term loans for operating capital needs
• Medium-term loans for intermediate assets
• Long-term loans for fixed assets

19
Choosing the Most AppropriateAMORTIZATION
PAYMENT PLAN

• Frequency
• Monthly, Quarterly, Semi-annually, Annually
• Types
• Fixed, equal payments
• Fixed principal payments
• Larger total payments in early years declining
  as maturity approaches
• Balloon payment
• Renegotiation at end of initial term

20
For further assistance

• Get in touch with your county extension agent
• Online Resources
• UGAs Department of Agricultural and Applied
  Economics, Extension Section
• http//www.ces.uga.edu/Agriculture/agecon/agecon.h
  tml
• UGAs Center for Agribusiness and Economic
  Development
• http//www.agecon.uga.edu/caed
• UGAs Small Business Development Center
• http//www.sbdc.uga.edu/