- - AGRICULTURAL CORE CURRICULUM - - (CLF1400) Advanced Core Cluster: AGRICULTURAL BUSINESS MANAGEMENT (CLF1000) Unit Title: FINANCE AND CREDIT ____________________________________________________________________________ (CLF1404) Topic: APPLYING FOR A LOAN Time Taught in Year(s) 2 hours 3/4 ____________________________________________________________________________ Topic Objectives: Upon completion of this lesson the student will be able to: Learning Outcome #: (F-5) - List factors affecting repayment capacity. (F-6) - Distinguish among various types of assets and liabilities. (*-*) - Complete a loan application. (*-*) - Understand how interet is calculated. Special Materials and Equipment: Loan application form, 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) and completion of loan application TOPIC PRESENTATION: APPLYING FOR A LOAN A. What should I look for in a lender? 1. Choosing a lender is like making any other kind of purchase. It is advisable to shop around for the best deal possible. a. The choice of a lender is a very important decision because agriculture, more than most enterprises, is heavily dependent on credit. 2. To a large extent, the type of financing needed will determine the type of lender to choose. a. Some lenders make only long-term loans for real estate; others make only short-term loans for production expenses. 3. Once the type of financing needed has been determined, take a closer look at the lenders who make those loans. Since most farmers need financing a regular basis, it is advisable to establish a long-term working relationship with the lender. 4. Consider the lender's reputation. a. Look for a lender with a reputation for fairness and honesty, one who wants borrowers to succeed and who seeks business. b. The lender should understand agriculture and the fact that farmers take a large risk each time they plant a crop, make an investment, or contract for a sale. 5. Consider the lender's policy with regard to loans. a. The terms offered should match the seasonal nature of farming. b. In addition, interest rates should be in line with the risk involved and the prevailing cost of capital elsewhere. c. The lender should realize that agriculture is--by nature and because of nature--an uncertain business and should be willing to see borrowers through times of low prices or difficult times. d. The security required for a loan should not be extreme. Also, the charges for granting and servicing the loan should be reasonable and fair. Consider the lender's eligibility requirements and the speed with which a loan is processed. 6. Consider also the permanence and dependability of the lender. a. Farmers need a stable source of funds for their agricultural operations; a lender in financial difficulty is not a good source for a loan. b. The risk of having a loan called in (which means that the borrower has to pay in full or find another source of financing) because the lender is in financial trouble is a risk to be avoided if at all possible. c. Dependability is important because farmers need the lender most when times are bad. 7. Consider the lender's experience with agriculture. a. Unless the lender understands the problems peculiar to agriculture, it is difficult to establish a good working relationship. 8. The lender should understand that farmers may need to borrow large sums but that these larger sums can increase the income of their operations. The lender should also be able to provide good financial advice when needed. 9. The uncertainty of farming demands good working relationships between farmers and their lenders, relationships that combine flexibility with realism. Although such relationships cannot reduce financial uncertainty, they do increase the chance of profitable growth and expansion of farming operations. B. Factors Affecting Repayment Capacity 1. The lender expects the loan to be repaid in full with interest. 2. Lenders look for the three Cs of credit: Character, capacity, and collateral. a. Character refers to the experience and personal integrity of the borrower. The personal credit history of the borrower is always investigated. b. Capacity refers to the ability of the business to repay the loan. c. Collateral is the equity offered by the business to secure the loan. 3. The capacity to repay a loan is primarily determined by: a. The profitability of the firm b. The degree of risk the business is exposed to c. The cash flow characteristics of the firm; money must be available to make payments when payments are due. d. The ability of property purchased with a loan to generate enough income to repay the loan. C. Applying For a Loan 1. Regardless of the type of loan needed, when a borrower meets with a loan officer, the following information should be brought to the meeting (much of this information will be found in the farm record book): a. Know what is wanted. If it is a piece of equipment, for example, have several options, with prices and descriptions. b. Know why it is wanted and how it will be paid for. Prepare a partial projected budget. For example, if a prospective borrower is milking 15 cows and wants to buy 5 more, he should show how the purchase will generate enough income to allow loan payments and also provide a profit to his operation. c. Bring an up-to-date financial statement, listing assets and liabilities. Assets are what is owned, even if money is still owed on them; examples are vehicles, machinery, real estate, crops (growing or stored), livestock, bank accounts. Liabilities are what is owed; examples are debts (such as home or car loans), whether secured by notes (written agreements) or by verbal agreements. 2. The loan officer will ask about the prospective borrower's financial history and recordkeeping system. The loan officer will visit the enterprise, so the owner should try to make a good impression. The more information that is provided, the sooner the loan application can be evaluated. 3. A loan officer considers five things when approving a loan: a. The borrower as an individual b. The borrower's financial condition c. The borrower's repayment ability d. The purpose of the loan e. The collateral, i.e., the assets that secure the loan ____________________________________________________________ ACTIVITY: 1. Why should a borrower establish a long-term relationship with a lender? 2. Why is a stable source of funds important to an agriculturalist? 3. What does a lender look for in a borrower? What factors affect a borrower's ability to repay a loan? 4. Compare the lenders in the local area. Who offers what types of loans? How do their policies and procedures differ? Is one preferable over the others? Why? 5. Assign each class member a public or private lending source and have him or her determine the interest rates on the credit available; consider short-, intermediate-, and long-term loans. Summarize the class findings on the blackboard after everyone has completed the assignment. (NOTE TO INSTRUCTOR: Write down the questions the students should ask and take 5 minutes to review telephone etiquette.) 6. Complete a loan application from a local lender. 7. Prepare a business plan to be used in applying for a loan. ____________________________________________________________ Topic Test Name___________________ Date___________________ 1. All lenders provide the same types of loans. TRUE OR FALSE? 2. One lender is as good as another. TRUE OR FALSE? 3. For a farmer seeking a loan, a lender experienced in making agricultual loans is preferable to one with little experience in the field of agriculture. TRUE OR FALSE? 4. It is preferable to do business with a lender willing to see the borrower through _______________ and ____________ times. 5. Most lenders offer short- and long-term loans. TRUE OR FALSE? Test Key 1. False 2. False 3. True 4. Good & bad 5. True 12/12/91 GFV/EEZ/sg #%&C