Agriculture Reference
In-Depth Information
interest rates than banks. Commercial fi nance companies may also demand a considerable
amount of control over management decisions. This is particularly true if the loan involved
is high risk. Sometimes commercial fi nance companies will pay off all fi rm debts in order
to consolidate the fi rm's indebtedness into one loan held by the fi nance company. This can
be of particular value if cash fl ow presents a problem, because payment schedules can be
reconstructed within the constraints of the agribusiness's cash fl ow.
Cooperative borrowing
Cooperatives, of course, have all the conventional borrowing sources, but in addition, agri-
business cooperatives can borrow from CoBank, which is part of the Farm Credit System. In
cooperative borrowing
, the cooperative patrons, who are also its borrowers, own these
special banks. The bank makes short-, intermediate-, and long-term loans to its members.
To receive a loan, a cooperative must purchase an amount of membership stock that is
equivalent to the amount of money being borrowed. This stock is revolved or repurchased
whenever the debt is repaid and the fi rm has funds available for that purpose. Often CoBank
can offer better interest rates than some commercial banks because it is a nonprofi t organiza-
tion operated exclusively for the benefi t of its members. Because they specialize in loans to
cooperatives, the bank's personnel are often able to offer management help and guidance
to member-borrowers.
Types of loans
Several types of loans are available to agribusinesses, depending on the terms and the col-
lateral the manager desires. For example, the manager may want to pledge his accounts
receivable as collateral to obtain short-term credit during the time it takes to collect those
accounts receivable. Or the manager may want to pledge the inventory that is being carried
for collateral and pay the loan amount as the inventory is sold. A third alternative is to
sign a promissory note and pledge assets such as equipment, buildings, and real estate as
collateral and spread the payments over several years. A few of the more common loan types
are discussed in the paragraphs that follow.
Accounts Receivable Loans
are loans in which the bank lists a business's accounts
receivable as collateral. This may be done on either a notifi cation or non-notifi cation basis.
Notifi cation means that the bank informs the debtors (customers of the agribusiness) that it
wishes to collect the money that is owed. The bank receives the payment from the customer
and then deducts a service charge and interest. The bank then credits the balance against the
loan to the agribusiness. Under non-notifi cation, the agribusiness (borrower from the bank)
collects the receivables and then forwards the payments to the bank. Record keeping and
interest costs are usually high, and managerial fl exibility is lost when using non-notifi cation,
so non-notifi cation loans should typically be avoided.
Many bankers are reluctant to provide accounts receivable loans and charge higher inter-
est rates on such loans to discourage their use by agribusinesses. Also, since there is no
guarantee that all of a fi rm's accounts receivable will be collected, the bank will limit the
amount of accounts receivable that may be used as collateral against any loan. This limit will
be a function of the fi rm's credit policy, record of collections, and current as well as fore-
casted future economic conditions. It is common for this limit to approach 50 percent of a
fi rm's accounts receivable.
