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Financing Issues for Small and Beginning Farmers

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. OUTLINE. Financing Opportunities Potential Suppliers of Funds Credit Risk Loan Negotiations

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Financing Issues for Small and Beginning Farmers

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  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 what’s 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? • Lender’s 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. FSA’s 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 applicant’s 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 borrower’s 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 you’ll 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!!! • What’s 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: • UGA’s Department of Agricultural and Applied Economics, Extension Section • http://www.ces.uga.edu/Agriculture/agecon/agecon.html • UGA’s Center for Agribusiness and Economic Development • http://www.agecon.uga.edu/~caed • UGA’s Small Business Development Center • http://www.sbdc.uga.edu/

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