Get your financing ducks in a row
In a previous article the fact that the best debt is cash was emphasised. However, it was also explained that unfortunately we know, especially with a farming business, it is not always possible to pay cash and you are at times forced to borrow money. With the drought experienced this year in certain grain producing areas many farmers will be forced to borrow money to produce their next crop. It is not possible to describe within the length of this article all the financing products available, thus we will concentrate on the principles.
First of all, the question: Do I need to borrow money? This needs to be answered. There is but only one way to answer and substantiate this question and that is by compiling a proper budget. A budget (a physical and financial plan) should indicate what you are going to do and when and what it will cost and what your income will be. The budget must be at least for a year period.
Secondly, by means of the budget the farmer can then also distinguish which type of capital (money) is needed – capital to purchase assets (for example a tractor) or capital for production purposes. In view of the drought and subsequent poor crops one should perhaps ignore borrowing capital to purchase assets this year. It is more important to obtain capital to produce your next crop.
Thirdly, when you have decided that you really need to borrow money the next question is: From whom? To answer this question you will have to put in an effort to obtain information. Nobody will come and offer you a loan. Remember nothing comes easily and funding especially for new farmers and/or small farmers is not readily available. Contact financial institutions (banks), agricultural businesses, the Land Bank, Grain SA, the National Department of Agriculture, the Department of Rural Development and Land Affairs, the relevant provincial departments, and others for information. The more information you obtain the better choice you can make.
The different financing products of the different institutions differ considerably and continuously change as affected by changing circumstances. For instance, as was reported in the Farmers Weekly of 3 April 2015 the Department of Trade and Industry has recently devised a programme to give emerging farmers access to funding and international markets. The “Black Industrialist Programme” planned to be launched soon will provide cheap loans through the Land Bank, Industrial Development Corporation, Development Bank of SA and the Public Investment Corporation. Even Nerpo has now resolved to establish a “Farmers' Cooperative Bank” to provide financing to smallholder farmers.
Fourthly, according to the rules and regulations of the national Credit Regulator and of the Consumer Protection Act no institution may borrow you money without the necessary paper work. We just cannot get away from paper work. What does the paper work entail? Normally your application for a loan must be supported by actual and budgeted balance sheets, income statements and cash-flow statements. The balance sheet and income statement portray your financial position for the last couple of years, your present financial position and budgeted statements portray your expected financial position for the next year. The cashflow budget is used to determine your repayment ability. The repayment ability refers to the amount of money that the farm business has available annually for meeting loan obligations. It is the amount available after making provision for all farm and household expenses. No bank or other financier can prudently grant credit without first establishing the repayment ability of the applicant. For that they need the paper work and take note that each institution has its own set of requirements regarding the paper work.
The repayment ability of the business is influenced by the income-generating ability and disposable income of the business, the fixed liabilities of the business, the interest rate, and the term for which the loan is granted.
Providing all these statements is a burden but on the other hand it is very advantageous. It forces you to apply a proper financial record system and therefore helps you to become a manager par-excellence. You can either complain how difficult it is or you can take up your pencil and apply your record system, the choice is yours. Nobody else is going to do it for you. It is up to you to manage your business in such a way that you will still be there when the rain comes. We have already stated that obtaining funding is difficult and without your own positive inputs it is that more difficult.
In conclusion, because of the difficulties in obtaining funding do not wait till the day you need the funding. Do your homework well in advance, get your paperwork in order and get as much information as you can.
Article submitted by Marius Greyling, Pula Imvula contributor.
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Publication: June 2015