Obtaining Financing for an Agribusiness Unit 3 Agribusiness

Obtaining Financing for an Agribusiness Unit 3: Agribusiness Planning and Analysis Lesson: AP 5

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: 1. 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. 2. 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

LOAN CHARACTERISTICS 7 SOURCE TYPE OF LOAN Farm Credit System Short, intermediate, and long-term loans Loans for land, equipment, inventory, business assets, and operating loans for production agriculture and agribusinesses Commercial Banks Short, intermediate, and long-term loans Loan money for almost anything – real estate, inventory, capital assets, etc. Payment schedule requires a single payment or periodic payments of interest and principle Savings and Loans Long-term loans Real estate, housing, etc. Provides direct and government-guaranteed farm loans to persons engaged in agricultural production who will be owner(s) or operators of an agricultural production operation or facility when the loan is closed Makes loans for farm ownership, soil and water conservation improvements, operating expenses, and emergency purposes Government Agency: Farm Service Agency Government Agency: Small Business Administration Short, intermediate, and long-term loans Primarily guarantees loans made by private lenders to entrepreneurs and small businesses Insurance Companies Short, intermediate, and long-term loans Allow individuals to borrow against the cash surrender value of their life insurance policy to make purchase Money that can be invested in the ownership of a business May involve selling stock on the open market to investors or taking on partners Venture Capital Dealers/Suppliers Short, intermediate, and long-term loans Loan almost exclusively on the product dealer is selling Cars, tractors, feed, fertilizer, greenhouse, etc. Individuals Short, intermediate, and long-term loans Loaned primarily for the sale of real estate with owner financing and personal loans to relations and friends

8 Securing A Loan 1. 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 2. Business and Capital plans 3. Proposed collateral to secure the business loan 4. Cash Flow of the business – Sum of the Cash Flow from all activities including operating, investing and financing activities 5. Marketing plan with market position statements 6. Business Resume 7. Business records to support past production, scope, inventory turns, account management

9 5 C’s of Credit Capital • Measures the financial value of assets, liabilities, net worth, equity, liquidity, debt structure, and composite makeup of the business financial statement • Whether money will be available to pay off principal and interest when payments are due Capacity • Measures the ability and efficiency of a business to generate sufficient revenue to meet operating expenses, owner withdrawals, income taxes, loan payments and capital replacement needs Collateral • Assets that can be offered as security for the loan Character/Management • Credit history and management experience of the entrepreneur Conditions • Loan amount(s) approved, terms (number of years, payment amounts, etc. ), interest rate, etc.

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 • Rating agencies – Equifax, Transunion and Experian • Scores range between 300 and 850 • Score rating ranges – Above 700 indicates very good credit history – Current indebtedness – 680 – 699 indicates a good source – Types of credit used – 640 – 679 average score – Length of credit history – 620 – 639 below average – New credit – 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 FICO scores on

13 Kinds and Sources of Credit Secured • Guaranteed by collateral Unsecured • No collateral needed • Based on credit score and ability to repay Revolving Installment • Repeated transactions up to a maximum limit • Monthly payments paid based upon monthly charges • Interest added to remaining balance at end of month • Credit cards • Loan made for fixed amount of time • Repaid in fixed monthly installments • Interest charges included in monthly payments • Car loans, home loans, etc.

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?