Financing the agribusiness - Agribusiness Management - page 253

It is important for the agribusiness manager to recognize that short-term borrowing is
only appropriate for temporary uses. When, for example, funds are borrowed to increase
inventories in order to accommodate increased sales volumes, and the loan is expected to
remain in force for some time, a more permanent form of funds is needed. Such a permanent
loan will increase the total working capital of the fi rm. Likewise, short-term loans should
not be used to acquire fi xed assets whose repayment term will likely be much longer than
one year.

Intermediate-term loans

Intermediate-term loans are typically used to provide capital for one to fi ve years. Such a
loan is almost always amortized; that is, the process in which the amount of a loan is reduced
by equal, periodic (i.e., monthly, quarterly, annual, etc.) loan payments. These payments
include both interest and principal. A simple illustration is provided in Table 11.1.
The purpose of the intermediate-term loan is to provide the agribusiness with a source of
capital that will allow growth or modernization without forcing the owners to surrender
control of the business. These loans allow for additional working capital, which can be used
to increase revenues and sales; the funds generated by the increased revenues will, in turn,
help to retire the loan.
In many respects the intermediate-term loan is similar to the short-term loan. Most require
some sort of collateral and/or security against fi xed assets, if that is the purpose of the
loan. Intermediate-term loans provide permanent increases in capital for the agribusiness
whenever larger inventories, larger accounts receivable, new equipment, and/or moderniza-
tion are essential to the growth and profi tability of the fi rm. Doug Davies foresaw a need
for an intermediate-term loan. He wanted to increase both his accounts receivable and his
inventory as he acquired the lumberyard. He also needed funds to pay for moving and
consolidating his operation at the new central site.

Long-term loans

In general, long-term loans have a duration of more than fi ve years. The time distinctions
among these loans are somewhat arbitrary, and there is some overlap in the functions of
intermediate- and long-term loans, depending on the philosophies and policies of lender and
borrower. But the real difference between intermediate- and long-term loans usually rests

Table 11.1 Example of the repayment schedule for a $5000 loan a

End of Year (1)

Payment ($)

(2)
Interest b ($)

(3)
Principal (1-2) ($)

(4)
Balance ($) c

0
1
2
3

5,000.00
3,489.46
1,827.87
0

2,010.54
2,010.54
2,010.66 d

500.00
348.95
182.79

1,510.54
1,661.59
1,827.87

Notes: a Amortized with three equal annual payments and a 10 percent interest rate.
b Calculate by multiplying the balance at the start of the year by the contractual rate of interest (10 percent).
c Balance at the start of the year minus the principal payments [column (3)] for the year.
d Sometimes the last payment must be adjusted slightly to completely repay the loan due to rounding.