Understanding Agribusiness & Personal Credit

1. Understanding Agribusiness & Personal Credit

2. Objectives • Discuss the importance of credit. • Explain three fundamentals of credit. • Differentiate between long-term & short-term credit. • Describe three areas for which credit is needed. • List & discuss the different sources of personal credit.

3. 1. Importance of Credit • In agriculture, credit is needed to overcome a shortage of equity capital. • Equity capital, also called venture capital, is capital that is invested or available for investment in the ownership element of a new or fresh enterprise.

4. 1. Importance of Credit • Credit allows production agriculturalists to: - increase production - improve the quality of what is produced - revise operations to make them more profitable

5. 2. Three Fundamentals of Credit • When dealing with credit, there are three “R’s” that we need to be aware of: Returns Repayment Risk

6. 2. Three Fundamentals of Credit Returns: The main reason for borrowing money is to increase net returns & make a profit. A production agriculturalist must carefully choose among the best alternatives when considering credit. It is important to analyze each investment based on the ability to pay back the borrowed money.

7. 2. Three Fundamentals of Credit Repayment: Agricultural lenders expect their money to be repaid in full plus interest. Individuals or companies in the agriculture industry must determine their ability to repay loans. Borrowers usually pledge their farms or agribusinesses as collateral for their loans. The inability to repay may lead to foreclosure.

8. 2. Three Fundamentals of Credit Risk: Borrowers with strong assets can take on more risk than those with fewer assets. Lenders tend to favor individuals in the ag industry who have enough stability to absorb a potential loss.

9. 3. Long-term & Short-term Credit Long-term Credit – the extension of credit by the decision of the lender. These are loans that can extend over 10 years. Examples of purchases: land, buildings, housing. The typical credit instrument used in long-term financing is a mortgage.

10. 3. Long-term & Short-term Credit Short-term Credit – usually refers to loans for one year or less. When your business doesn't qualify for a line of credit from a bank, you might still have success in obtaining money from then in the form of a one-time, short-term loan (less than a year) to finance your temporary working capital needs.

11. 4. Three Areas of Credit Needs • In the agriculture industry, financing is needed in three areas: fixed expenses, operating expenses and startup expenses.

12. 4. Three Areas of Credit Needs Fixed Expenses – items that can be used over and over for a long period of time, incurring the same price (expense) each year. Examples of Fixed Expenses: land, buildings, machinery & equipment, tools and fixtures.

13. 4. Three Areas of Credit Needs Fixed Expenses (cont.) Usually, a large amount of money is borrowed for fixed expenses, but the repayment amount is fixed monthly or yearly for several years.

14. 4. Three Areas of Credit Needs Operating Expenses – covers everything needed to run a farm, ranch or agribusiness. The amount of money needed depends on the size of the operation. Examples of Operating Expenses: communication, transportation, utilities & fuel, taxes, insurance & advertising.

15. 4. Three Areas of Credit Needs Startup Expenses – payable before the business begins operation. Examples of Startup Expenses: attorney’s fees, incorporation expenses and costs for the development of the site or product. Startup expenses do not include the initial cost of land & other fixed items.

16. 5. Sources of Personal Credit • There are two primary sources of personal credit: Credit Cards Personal Loans

17. 5. Sources of Personal Credit Credit Cards – an easy source of credit. Advantages: • Provide an avenue of immediate payment. • Provide an opportunity for purchase by telephone, mail or internet. • Delay the actual cash outlay. • Provide documentation for financial transactions.

18. 5. Sources of Personal Credit Credit Cards (cont.) Disadvantages: • If a credit card is lost or stolen, some one else may gain funds at your expense. • There is always a possibility of overspending. • Can be penalized with high interest rates & annual fees.

19. 5. Sources of Personal Credit Personal Loans - debts taken on by individual consumers. They can range in size, dimension, terms, and conditions. Advantages: • Provides large sums of money • Provide a funding source enabling individuals to advance their projects & programs.

20. 5. Sources of Personal Credit Personal Loans (cont.) Disadvantages: • High interest rates • Higher costs • Not tax deductible