- - AGRICULTURAL CORE CURRICULUM - - (CLF1000) Advanced Core Cluster: AGRICULTURAL BUSINESS MANAGEMENT (CLF1400) Unit Title: FINANCE AND CREDIT ____________________________________________________________________________ (CLF1403) Topic: PRIVATE SOURCES OF CREDIT Time Taught in Year(s) 1 hour 3/4 ____________________________________________________________________________ Topic Objectives: Upon completion of this lesson the student will be able to: Learning Outcome #: (F-3) - List factors to consider in selecting a source of credit. (F-4) - Match sources of credit to a list of advantages and disadvantages. Special Materials and Equipment: Supplemental Worksheet #1, guest speaker from a local bank, and CLF1406 - Glossary References: Luening, R. A., Klemme, R. M., & Mortenson, W. P. (1991). THE FARM MANAGEMENT HANDBOOK (7th ed.). Danville, IL: Interstate Publishers. Osburn D. D., & Schneeberger, K. C. (1983). MODERN AGRICULTURAL MANAGEMENT: A SYSTEMS APPROACH TO FARMING (2nd ed.). Reston, VA: Reston Publishing. Evaluation: Topic Test (attached) TOPIC PRESENTATION: PRIVATE SOURCES OF CREDIT A. There are four main sources of private credit available to agriculturalists. They are: 1. Insurance companies 2. Commercial banks 3. Individuals 4. Merchants and dealers B. These lenders offer short-, intermediate- and long-term credit for real estate and operating expenses. 1. The types of loans vary with the source. Not all lenders offer all types of loans. C. Insurance companies often provide intermediate- and long-term credit to agriculturalists for purchasing real estate. 1. Insurance companies seek long-term (many years), high-yield (make lots of money), low-risk investments. a. If there is much risk involved that the borrower will go "broke" they won't lend any money; they loan only in safe and profitable situations. 2. Loan terms vary depending on the state of the economy and the company making the loan. a. The favored type of loans are intermediate-term loans of approximately 15 years in length. 3. Aside from the obvious disadvantage of the low-risk requirement, the terms (for the loan) offered may not be as flexible as those offered by government and quasi-government institutions (e.g., PCA institutions. D. Commercial banks are another source of farm credit. They usually provide operating capital rather than long-term real estate loans for agriculturalists. 1. This is because banks have to maintain a relatively "liquid" loan portfolio (collection). a. The term, "liquid" refers to the time necessary to convert assets and investments into cash. b. Since banks must pay their depositors on demand, they may need readily available cash and cannot afford to have it tied up in long-term loans. 2. Short-term operating loans usually make up the bulk of a local commercial bank's lending activities; however, banks will often make real estate loans for a short period of time. 3. It is to the advantage of the borrower to do other business with the bank as well (e.g., checking and savings accounts); the bank gets to know their customer and may be willing to tailor the terms of a loan to suit the borrower's particular situation. 4. If the bank cannot offer the type of loan needed, it may help to arrange a loan with another lender. 5. The fact that a local bank may not be knowledgeable about agriculture and its particular financial needs is an obvious disadvantage. a. The "liquidity" needs may also be reason enough for a bank not to make a loan. E. Individuals are the third source of credit available to borrowers. They are important sources of loans for purchasing land. 1. The seller of a piece of farmland, for instance, may finance the purchase. a. One advantage to the seller is that capital gains income (which is taxable) is reduced because all of the money from the sale is not received at once but is instead spread over a period of years. b. The loan payments can be a dependable source of income if the original owner (seller) is retiring. c. The buyer benefits by getting a low down payment and generally favorable repayment terms. 2. Individuals also make loans for: a. Starting a business b. Expanding a business c. Operating a business 3. Transactions with individuals should be carried out in a businesslike manner with appropriate documentation. a. The true financial condition of the borrower and the lender should be known to both parties. b. The amount of money loaned and the terms of repayment should be recorded in the form of a contract. (See the Ownership Enterprise Agreement, page 3a of the California Vocational Agriculture Record Book, for an example.) F. Merchants and dealers in agricultural supplies may be sources of credit. 1. Credit from these sources almost always consists of short-term or intermediate-term credit for operating expenses. a. For example, implement dealers sometimes provide financing for large purchases and seed, fertilizer, and other seasonal dealers sometimes allow their customers to pay for goods in installments. 2. It is important to remember that obtaining goods on credit costs something in terms of higher prices, since the dealers must use their own credit in order to extend credit to their customers. __________________________________________________________ ACTIVITY: Invite a local banker to discuss the kinds of services available to (1) agriculturalists and (2) the general public. (NOTE: This will help students answer #4 on the Supplemental Worksheet.) __________________________________________________________ Supplemental Worksheet #1 Name______________________ Date______________________ 1. Name four private sources of credit available to agriculturalists. 1. 2. 3. 4. 2. What types of loans do insurance companies seek? 3. What are the advantages and disadvantages of getting a loan from an individual? 4. Interview a local banker and find out what kinds of services are available to students. Would it be possible to do all types of banking business with this bank? What types of loans does the bank make? Are there limits to the size and terms of loans? Topic Test Name______________________ Date______________________ - - Private Sources of Credit - - 1. Insurance companies are a good source of operating credit. TRUE or FALSE? 2. Banks are a good source of long-term real estate loans for agriculturalists. TRUE or FALSE? 3. Insurance companies usually limit their lending to agriculture. TRUE or FALSE? 4. Merchants and dealers don't include any of the cost of allowing customers to "buy on time" in the prices they charge for goods and services. TRUE or FALSE? 5. Most private lenders offer __________-term and ____________-term loans. 6. What are the major disadvantage(s) of trying to obtain a loan from an insurance company? 7. Why is it necessary for commercial banks to maintain a "liquid" loan portfolio? 8. If a commercial bank cannot make a loan to a customer, can it can help the customer secure a loan through another agency? Yes or No Test Key 1. False 2. False 3. False 4. False 5. Short & intermediate 6. Insurance companies generally seek low-risk, high-yield investments (sometimes the risks involved in agriculture are too high for them). 7. Since banks must pay their depositors on demand, they may need cash in a hurry and cannot afford to have their money tied up in long-term loans. 8. Yes 11/12/91 GFV/EEZ/ch #%&C