| | Introduction
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Did you know that you need to manage your credit as carefully as you would manage other production inputs? Like seeds and chemicals, agricultural credit options change and expand with new and innovative products, and can be complicated by legal concerns. Many agribusinesses now extend credit, while traditional lenders are working harder to attract your business. As a borrower, you are offered more choices and need to develop procedures to evaluate those choices. On the plus side, these choices give you the opportunity to better manage your financial affairs.
Objectives:
After working through this guide, you should be able to:
- Understand and use the language of credit to help you negotiate a loan
- Use a checklist of questions to help you evaluate a loan
- Apply what you learn in a case study to your own situation.
In short, this guide outlines a practical approach to evaluating loans. But, before you even start, establish short-and long-term financial objectives for your farm operation. Then understand the debt service capacity of your farm business, and the farm’s ability to service that debt. Finally, to evaluate credit options, you must understand all provisions and obligations, and be aware that the interest rate is not the only issue.
Note: The interest rate is not an entry on the income and expense statement; it is the amount of interest paid. This is a function of the interest rate and the amount of debt outstanding. The terms and conditions affect how you manage your financial risk.
Risk Tolerance
As a borrower, you must be comfortable with the level of risk or uncertainty offered by a credit arrangement or have provisions that reduce uncertainty to match your risk tolerance. You should be confident that the credit arrangement meets your objectives. Periodically review your credit arrangements to stay on track with those objectives.
The Language of Credit
Learning the language of credit is important as you manage your finances. The following sections provide you with the language and tools to help you better understand credit. For more information review the Guide.
Checklist for Agricultural Credit
Before you evaluate the specific terms of loans, consider goals for your family and farm. Choose a loan package with which you are comfortable and that meets your business objectives. Here’s a checklist to assist you in asking and answering those questions to help you evaluate different loans.
Checklist for Agricultural Credit
Checklist for Agricultural Credit – Sample Farm Case
This case will help you consider all the questions and some of the rational in your loan choice logic so that you can make better use of the Checklist for Agricultural Credit .
Checklist for Agricultural Credit – Sample Farm Case
Glossy of Agricultural Credit Terms
This a glossary of language of Agricultural Credit
Glossy of Agricultural Credit Terms
Acknowledgements
Adapted and reproduced with the permission of
University of Illinois at Urbana-Champaign
The Center for Farm and Rural Business Finance
Paul N. Ellinger and Peter J. Barry
Glossary reviewed by
Ian Logan and David Archibold, Barristers & Solicitors
Sharek Logan & van Leenen LLP
Edmonton Alberta
Reviewed and Prepared by:
Alberta Agriculture & Forestry
Livestock Research and Extension Division
Livestock and Farm Business Branch
7000 – 113 Street, Room 200
Edmonton, Alberta T6H 5T6 |
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