Obtaining Financing for an Agribusiness

1. Obtaining Financing for an Agribusiness Unit 3: Agribusiness Planning and Analysis Lesson: AP5

2. Objectives Lesson Objective: • After completing the lesson on obtaining financing for an agribusiness, students will demonstrate their ability to apply the concept in real-world situations by obtaining a minimum score of 80% on an Obtaining Financing for an Agribusiness Interview. Enabling Objectives: • Define three aspects of business financing, identify and describe three sources of business financing, and illustrate two key items a business should provide to secure a loan. • Describe the 5 C’s of Credit, identify how a FICO score is calculated, and compare and contrast the four kinds of credit.

3. Key Terms • Business Financing • Capacity • Capital • Collateral • Character • Conditions • FICO Score • Installment • Revolving • Secured • Unsecured

4. Financing – What Is IT?

5. Business Financing • Economic activity that helps businesses, organizations and production agriculture secure cash for short-term operating needs or long-term investment decisions • Good financial management involves borrowing only the appropriate amount of money needed • Involves shopping around to get the best interest rate possible • Young entrepreneurs wanting to start a business requiring large inventories or large capital investments may face challenges in obtaining a loan, so it is recommended to start small • Once a financial institution can confirm a history of good business management, they are more likely to lend a business money • Even if financing is not required to start a business, establishing a line of credit is important when running a business • A good credit history helps make it possible to obtain financing, if and when it is needed

6. Sources of Business Financing

8. Securing A Loan • Current and historical financial statements; historical tax returns or Profit and Loss statements – typically 3-5 years; Depending on size and complexity, accountant prepared statements for larger accounts may be necessary • Individual or business’s credit history • History of established business – Income and expenses • History of individual(s) starting a business – Experience and training • Business and Capital plans • Proposed collateral to secure the business loan • Cash Flow of the business • Sum of the Cash Flow from all activities including operating, investing and financing activities • Marketing plan with market position statements • Business Resume • Business records to support past production, scope, inventory turns, account management

9. 5 C’s of Credit

10. Lenders Also Evaluate… • Capacity of Management to manage risk, debt levels, expansions, and human relations issues • Cash flow leverage

11. FICO Score • A credit score lender’s use to determine applicant’s credit risk and whether or not to extend a loan. • FICO is acronym for Fair Isaac Corporation • Creators of FICO score • Looks at 5 areas • Payment history • Current indebtedness • Types of credit used • Length of credit history • New credit • Rating agencies • Equifax, Transunion and Experian • Scores range between 300 and 850 • Score rating ranges • Above 700 indicates very good credit history • 680 – 699 indicates a good source • 640 – 679 average score • 620 – 639 below average • 580 – 619 low score

12. Credit History • A record of an individual’s or company’s past borrowing and repayment behavior • Will list personal information, credit lines, currently in individual’s name, risk factors, late payments, and public records filed • Used by insurance companies, rental agencies, utility companies and others as an indicator of future performance • Typically rate charges based on FICO scores

13. Kinds and Sources of Credit

14. Conclusion • Money is required in order to start and run a business. This money is generally obtained through loans from a person or financial institution. Different sources of financing may be used, and different types of loans may be obtained. • However, in order to receive this financing, individuals and businesses must supply the lending institution with the necessary documents to measure credit score and the individual’s ability to repay the loan.

15. Review • Describe business financing • Identify and describe the 8 sources of business financing • What must a business provide to secure a loan? • Identify and describe the 5 C’s of Credit • What is a FICO Score? • How is it calculated? • What is credit history? • Describe the kinds and sources of credit

16. Exit Cards • What did you learn today about obtaining financing for a business? • What questions do you still have about obtaining financing for a business?