| | INTRODUCTION
This guide is designed to help you better understand credit. In the current risky economic environment, credit should be managed as closely and as carefully as other production inputs. Like seeds and chemicals, agricultural credit options are changing and expanding with new and innovative products, and can be complicated by legal concerns. Many agribusinesses now extend credit, while traditional lenders are working harder for your business. Borrowers are offered more alternatives and need to develop procedures to evaluate those choices. These alternatives give borrowers the opportunity to better manage their financial affairs.
This guide outlines a practical approach to evaluating loans. A borrower begins by establishing short-and long-term financial objectives for his or her farm operation. Then a borrower must understand the debt service capacity of his/her farm business, and the farm’s ability to service that debt. To evaluate credit options, the borrower must understand all provisions and obligations, and be aware that the interest rate is not the only issue. 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 will affect how the borrower will manage their financial risk.
A borrower must be comfortable with the levels of uncertainty or have provisions that reduce uncertainty to match his or her risk tolerance. A borrower should be confident that the credit arrangement will meet his or her objectives and should periodically review their credit arrangements to stay on track with those objectives.
Many terms used by lenders and others offering credit are defined in the glossary of this guide and are illustrated in the following sections. Learning the language of credit will be important as you manage your finances. Before entering any formal loan agreement, consult with a lawyer, accountant, or farm financial consultant.
TYPES OF AGRICULTURAL LOANS
In this guide, agricultural loans are categorized as short-term or long-term, depending on their maturity. Lenders often describe loans by the purpose or terms of the loan. Descriptions also change from Lender to Lender. Short-term loans are often used for operating expenses. Loan amortizations usually matches the length of the agricultural production cycle (e.g., 3 to 18 months), hence a short-term loan. However, this may be described as line-of-credit financing under a credit commitment, which specifies the amount and timing of the disbursements and payments of the loan. The line-of-credit may be a single disbursement due at a specified future date or a revolving line-of-credit, operating loan, in which the borrower may borrow and repay as needed during a specified time period, usually subject to a maximum borrowing limit. On a non-revolving line-of-credit, a borrower is entitled to a specified amount of funds, and repayment does not allow the borrower to draw those funds again. These short term loans can be secured against inventory at an agreed percentage of current market value or against real property.
Long-term loans are used to finance depreciable assets such as machinery, equipment, breeding livestock and improvements, and to acquire, construct and develop land and buildings, They are usually are amortized over periods longer than 18 months. Depending on the security and commitment various credit instruments and credit facilities can be used. Each with their own unique features and covenants.
To view more information and full publication click and download PDF
Glossary of Agriculture Credit terms - to view Glossary click here for PDF
Farmers’ Checklist for Agriculture Credit – click here for PDF
Acknowledgement
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
Rick Dehod, Farm Financial Specialist |
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