Agriculture Reference
In-Depth Information
Trade credit
Trade credit is one of the most neglected sources of capital available to agribusinesses
managers. It is the credit advanced by suppliers and vendors of the agribusiness fi rm. If the
agribusiness is creditworthy, most suppliers and vendors will allow credit terms. The man-
ager can often negotiate for longer credit terms than are usually offered. For example, Doug
Davies was such a steady purchaser of treated lumber that he was able to get his supplier to
extend his normal 30-day credit terms to 90 days from invoicing. In Doug's case, he had
often collected for the farm building prior to the 90-day credit period, so in a very real sense
the lumber supplier also became a supplier of Doug's business capital, but without any cost
to Doug. In other cases, a supplier may be willing to sell to an agribusiness on consignment.
This means that the business does not have to pay for supplies until it is able to actually sell
them. The agribusiness manager should make sure that suppliers and vendors are extending
maximum terms, and that the procedure for paying accounts payable takes every advantage
of all credit terms extended.
Commercial banks
Commercial banks are the major source of borrowed funds for most agribusinesses, with
the exception of trade credit. Commercial banks usually offer a full line of banking services,
including checking accounts, savings accounts, and loans. Banks make many kinds of loans,
such as short-, intermediate-, and long-term loans, lines of credit, and special loans.
Banks also make personal unsecured loans to owners, and many other kinds of secured
loans, such as mortgages against real property; chattel mortgages against tools and equip-
ment; and loans against the owner's life insurance policies, stocks and bonds, etc.
Often a bank will offer to help sell a product by buying sales installment contracts from
the seller. Sales installment contracts are contracts made by the buyer to pay for the product
in a specifi ed manner over a period of time. When a fi nancial institution buys the contract,
payments are made directly to that institution. The business gets its money immediately.
This procedure makes it easier for the customer to fi nance the purchase and help the
cash fl ow of the business. This is particularly helpful to retailers who are selling relatively
expensive items, such as farm implements, tractors, and combines.
Insurance companies
Insurance companies are always looking for places to invest funds they have collected
from policyholders. Most insurance companies are interested in intermediate- and long-term
loans on fi xed assets, such as equipment or real estate. They prefer large loans and mort-
gages for collateral. If the owners or the agribusiness itself have insurance policies with a
particular company, that company will usually lend the agribusiness amounts that are equal
to the cash value of the policy at very favorable interest rates.
Commercial fi nance companies
Commercial fi nance companies are those fi nance companies that specialize in business and
commercial loans. They are not to be confused with personal fi nance companies, which
make loans to individuals. Commercial fi nance companies often grant loans that are riskier
than those that banks will accept, so commercial fi nance companies normally charge higher
 
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