Agriculture is a very important sector, and plays a key role in the economic development of the country, especially for many smaller communities. A healthy farm business heavily depends on proper access to financing.
There can be a number of risk factors associated with farm financing.
Despite its importance, this sector is exposed to several risks, among them:
- Environmental risks: weather conditions or other natural events may have a negative impact on production
- High levels of informality: a lack of fixed and credible Information concerning prices results in difficulties in conducting a financial analysis
- Lack of collateral: related to issues of land and property ownership in Albania
Because of the challenges facing this sector, agricultural businesses have not been appropriately served by the banking system. While it contributes 23% to Albania’s GDP, financing for agriculture accounts for barely 1.5% of all loans issued by the country’s banking sector. Yet the agricultural sector growing continuously, and bank loans could play a vital role in supporting this growth.
Types of Farm Loans:
Agricultural loans are categorized as short-term, intermediate-term or long-term, depending on their maturity. Lenders often describe loans by the purpose or terms of the loan. For example short-term loans are often used for operating expenses. Loan maturity usually matches the length of the agricultural production cycle (e.g., 3 to 18 months), hence a short-term loan. However, this may be described as line-of-credit financing under a credit commitment, which specifies the amount and timing of the disbursements and payments of the loan. The line-of-credit may be a single disbursement due at a specified future date or a revolving line-of-credit in which the borrower may borrow and repay as needed during a specified time period, usually subject to a maximum borrowing level. On a non-revolving line-of-credit, a borrower is entitled to a specified amount of funds, and repayment does not allow the borrower to draw those funds again. A non-revolving line-of-credit is sometimes referred to as a draw note.
Intermediate-term loans are used to finance depreciable assets such as machinery, equipment, breeding livestock and improvements. In addition, intermediate-term loans are sometimes used to restructure a borrower’s balance sheet to provided additional working capital. Lenders often describe them as capital, or installment, loans. Loans usually range from 18 months to 10 years.
Long-term loans are used to acquire, construct and develop land and buildings, and usually are amortized over periods longer than 10 years. Lenders may describe them as real estate mortgages because they are usually secured by real estate. Long-term loans are sometimes referred to as contract financing, in which case a seller provides financing directly to a buyer.
Loan transactions typically include several documents for the borrower to sign, depending upon the type of loan. The note or promissory note is a document in which the borrower agrees to repay a loan at a stipulated interest rate within a specified period of time. The note may specify a variable, fixed or adjustable rate, and whether line-of-credit financing is being used. A loan agreement is a written agreement between a lender and a borrower stipulating the terms and conditions associated with a financing transaction, and the expectations and rights of the parties involved. The loan agreement may indicate reporting requirements, possible sanctions for lack of borrower performance and any restrictions placed on a borrower.
A security agreement is a legal document signed by a borrower granting a security interest to a lender in specified personal property pledged as collateral to secure a loan. Essentially, a security agreement states what happens to the collateral if a borrower fails to perform as promised. A financing statement is a document filed by a lender with public official. The statement reports the security interest or lien on the borrower’s non-real estate assets. The mortgage serves the same purpose in financing real estate.
TERMS AND CONDITIONS OF THE LOAN
As discussed earlier, a borrower needs to understand the note and loan agreement completely. This section outlines the primary loan terms and conditions included inmost notes and loan agreements.
Disbursement of Funds
Disbursements for intermediate- and long-term loans are usually a single payment advanced at a specified time. Some short-term operating loans may be single disbursements, but the trend in the lending industry is to establish lines-of-credit. This feature allows the borrower to reduce interest costs by using funds when needed and repaying funds as surplus cash is available.
Disbursement of funds on lines-of-credit is handled many ways. Many commercial banks allow the customer to phone or electronically submit a request for a specified amount to be deposited into the borrower’s checking account. The borrower’s loan balance is increased and funds are added to the borrower’s account. Or, the lender may provide the borrower a book of drafts. A draft can be used instead of a check to pay bills. The borrower’s loan balance increases when the draft clears the financial system and returns to the borrower’s financial institution. Lenders usually restrict drafts to business-related expenses.
Free Farm Financing Download: Farm Financing-Strategies
USDA Beginning Farmer Loan Programs
USDA Farm Service Agency (FSA) is the traditional lender of last resort and has its roots in providing funds to beginning farmers. They provide loans with funding Congress appropriates each year with a portion targeted toward beginning farmers.
- Land Contract Guarantee Program: Landowners willing to sell land to beginning farmers and ranchers on contract can qualify for a government guarantee through FSA. This program will provide one of two types of guarantees, to be in effect for 10 years:
- “prompt payment” guarantee
- 90% principal loan value guarantee
- Operating – Direct Loan: FSA can be used to purchase livestock, farm equipment, feed, seed, fuel, insurance or other operating expenses. Operating loans can also be used to pay for minor improvements to buildings, costs associated with land and water development, and to refinance debts under certain conditions.
- Per farm loan limit for direct operating is $300,000
- Five-year line of credit is also available
- “Graduation” to guaranteed or commercial credit is mandatory after 7 years. The 7 years can be consecutive or non-consecutive.
- Operating – Guaranteed Loan: FSA guaranteed loans are available through local lenders or Farm Credit Services. While the financing is through the local bank, FSA provides a guarantee to the lender up to 95 percent. Interest rates cannot exceed the lender’s average farm customer rate. In certain instances under the Interest Assistance Program, FSA will provide assistance in lowering the interest rate up to 4 percent. The loan limit for guaranteed loans is $1,094,000 (2008), a rate adjusted for inflation each year.
- Applicant must be unable to obtain credit elsewhere and have an acceptable credit history
- Ownership – Direct: Loan can be used to purchase farmland, construct or repair buildings, or promote soil and water conservation. The loan limit for direct ownership loans is $300,000. Program eligibility criteria for a direct loan from FSA include:
- sufficient education, training, and experience in managing or operating a farm
- applicant must have participated in the operation of a farm or ranch for at least 3 years out of the past 10 years
- applicant must be unable to obtain credit elsewhere and have an acceptable credit history
- Ownership – Down Payment Loan Program: Assistance with a down payment is provided by FSA
- Beginning farmer provides a 5 percent down payment
- FSA will then provide up to 45 percent toward the purchase, not to exceed its appraised value and not to exceed $500,000.
- With this $500,000 cap, the maximum FSA loan amount is $225,000. Note, however, that this is a cap on the amount of the FSA portion of the loan, not a cap on the value of the land to be acquired. The remaining 50 percent then comes from conventional sources, such as the local lender or seller-financing, with amortized payment over a 30-year period
- FSA loan term is 20 years, with an interest rate that is 4 percent lower than the regular FSA direct farm ownership loan interest rate, but no less than 1.5 percent.
- Ownership – Joint Financing 50/50( “Participation Loans”): This program does not require a down payment by the beginning farmer. FSA will provide up to 50 percent of the financing at an interest rate the same as the regular direct farm ownership loan program.
- Ownership – Guaranteed Loans: This is similar to guaranteed operating loans, above.
For more information on FSA loan programs for beginning farmers, contact your county USDA FSA office or get an overview from the Center for Rural Affairs – contact Anna Johnson at firstname.lastname@example.org. Also, check out Financing the Farm: Applying for a Farm Service Agency (FSA) Loan (PDF).
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