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Chapter 11: Financing the Agribusiness - Coggle Diagram
Chapter 11: Financing the Agribusiness
Objectives
Discuss the reasons agribusiness may choose to increase its financial resources
• Describe the alternative types of capital available to the agribusiness
• Outline the various types of loans available to the agribusiness and the situations that would
cause the agribusiness to select each specific type
• Explain how specific variables impact the annual percentage rate (APR) paid on a loan
• Discuss the relationship between the agribusiness firm’s tax rate and APR
• Show the usefulness of the cash budget in making loan requests
• Learn and apply the steps for developing budgets
• Understand qualitative and quantitative techniques for developing forecasts and budgets
• Understand the usefulness of pro forma financial statements in financial planning
• List some of the important external sources of financing
• Discuss leasing alternatives used in agriculture, including land, operating, custom hire, and
capital leases
• Describe the means of generating capital funds internally and the importance of this financing
alternative
Why Agribusinesses Seek Additional Financial Resources
Agribusiness firms often require extra funds to
Expand production or scale operations
• Purchase land, machinery, or technology
• Cover operating expenses in low-revenue periods
• Manage risk and uncertainty (weather, market prices)
• Seize investment opportunities
Types of Capital in Agribusiness
Debt Capital
Borrowed funds that must be repaid with interest
Equity Capital
Funds from owners or investors in exchange for ownership or shares
Hybrid Capital
Instruments with both debt and equity features (e.g., convertible bonds)
Types of Loans and When to Use Them
Operating Loan
Term Loan
Real Estate Loan
Line of Credit
Factors Affecting APR (Annual Percentage Rate)
APR includes the interest rate + fees + other costs. Factors affecting APR:
Creditworthiness of the borrower
• Loan amount and term
• Collateral offered
• Market interest rates
• Lender’s risk perception
Tax Rate and APR Relationship
The effective cost of borrowing can be reduced by tax deductions:
Interest payments on loans are often tax-deductible
A higher tax rate may lead to greater tax savings, reducing the net cost of borrowing
Formula:
After-tax cost of debt = APR × (1 - Tax Rate)
Cash Budget in Loan Requests
cash budget:
Shows projected cash inflows and outflows
• Highlights when funds are needed
• Helps justify loan amount and timing
• Demonstrates ability to repay
Developing Budgets: Steps
Define goals and time period
Estimate revenues
Estimate costs (fixed and variable)
Account for capital expenditures
Identify financing needs
Monitor and adjust as necessary
Forecasting and Budgeting Techniques
Qualitative
Expert judgment, farmer experience, scenario analysis
Quantitative
Historical data, regression models, trend analysis
Use of Pro Forma Financial Statements
Pro forma statements are projections based on expected future operations.
They help:
Evaluate investment decisions
• Test financial viability of expansions
• Plan for profitability and risk
Types include:
Pro forma income statement
• Pro forma balance sheet
• Pro forma cash flow statement
External Sources of Financing
Commercial banks
• Credit unions
• Agricultural credit cooperatives
• Government programs (e.g., USDA, NABARD)
• Microfinance institutions
• Private investors and venture capital
Leasing Alternatives in Agriculture
Land Lease
Operating Lease
Custom Hire
Capital Lease
Internal Sources of Capital
Retained Earnings: Profits reinvested in the business
• Owner Contributions: Capital added by proprietors or shareholders
• Asset Liquidation: Selling underutilized assets
Benefits:
No interest or repayment obligation
• Maintains ownership control
• Indicates good financial health