The planned repayment term as the first criterion for choosing a lender
When starting the search for financing, the first task at home for an entrepreneur is to be aware of the financial needs of his business and the planned repayment period of the loan. Historically, both in accounting and in other aspects of the financial world, financing is divided into two basic categories - long-term and short-term financing. The term of the loan usually also corresponds to the nature of the use of financing - long-term investments are usually financed with a long-term loan - purchase of real estate, equipment, machinery, construction projects. On the other hand, short-term financing most often fulfills the function of supplementing current assets - funds for the purchase of mineral fertilizers and other materials, payments for equipment repairs and other services, as well as for the payment of salaries and taxes.
If the bank refuses?
Often, the search for business financing is limited to financing from commercial banks, where after the first refusal, the entrepreneur adjusts or even cancels his financing and growth plans. It should be noted that in addition to bank financing, alternative financing is also available, which can be useful in a situation where bank financing is refused. In the context of geopolitical upheavals, the caution and collateral requirements of commercial banks have increased, which affects the availability of financing for companies that do not have available collateral or do not have perfect financial performance. If bank financing is not suitable or not available, we invite you to consider receiving financing from specialized non-bank lenders. Such financing providers include such companies as Capitalia, Agrocredit and others. The advantages of alternative lenders are faster evaluation, lower collateral requirements and higher risk tolerance. Alternative financiers are also much more willing to offer and are often used specifically for short-term lending needs. Although the rates of non-bank lenders will be higher than those of banks due to the additional risk taken, the quick and convenient acquisition of financing often compensates for the higher loan price.
For long-term financing, a commercial bank will most often be the first and right stop
Historically, commercial banks in Latvia focus directly on long-term financing services, and the agricultural sector has always been handy and relatively safe for all leading commercial banks. Although the process of evaluating and receiving financing in banks is often very time-consuming, due to a relatively lower interest rate and long repayment terms, a commercial bank will be the most suitable provider of long-term financing. At the same time, the entrepreneur should expect that the bank will also need a guarantee. Agricultural land, buildings, other types of real estate or registrable equipment are most often used as collateral. Despite the fact that the conditions of each bank are slightly different, the loan evaluation time in commercial banks is usually 1-2 months and the amount of financing is around 70% of the offered collateral's market value, determined according to the opinion of a certified property appraiser. Interest rates for long-term bank loans are usually between 3% and up to 6% per year, excluding EURIBOR or the variable part of the rate. It should be mentioned that with the increase of the variable part of the interest rate, the price of bank financing has increased rapidly in the last year, which must be taken into account when evaluating the total cost of the loan.
Equipment purchase = leasing
The purchase of machinery is very common in the agricultural business, as it ensures the most essential function of the farm - field processing and management. Similar to the case of long-term financing, the most optimal solution is likely to be offered by leasing from leading commercial banks. The conditions are particularly friendly for the purchase of new machinery, where banks finance up to 95% of the purchase amount, in addition to offering seasonal repayment schedules that are adjusted to the farm's cash flow. In the case of classic leasing, the equipment belongs to the leasing company, while the company is registered as its holder. Such a structure provides good security for the lessor, which also results in relatively low interest rates of 2% to 7% per year, excluding EURIBOR.
Complications can arise if the farm purchases equipment that does not qualify for commercial bank leasing (for example, the equipment is too old or specific) or if the viewed tractor equipment is located abroad, where the seller requires the full purchase price before delivery. In such cases, financing from specialized lenders can be useful, where equipment already owned by the farm can serve as collateral, or sometimes financing can be issued even before the delivery of the viewed equipment. It should be noted that various non-standard solutions and deviations from generally accepted commercial banking practice also involve additional risks, therefore the price of alternative financing for the purchase of equipment will most often be from 9% per year.
When time is more important than price
In agricultural business, situations often arise when the speed of receiving financing is more important than other conditions. The rising prices of arable land and the high demand for it are very favorable to those who sell it, and often the property is sold to the owner who is able to pay for it the fastest. Clearly, under time pressure, bank financing loses its appeal due to the disproportionately long evaluation periods. For this purpose, alternative or non-bank financing, which provides for faster evaluation terms and lower security requirements, will undoubtedly be the most suitable. For example, in the case of Capitalia, if the entrepreneur has submitted all the information necessary for the evaluation, the decision will take only 1-3 working days and the interest rate will start from 10% per year. The so-called "bridge financing" structure is often used for the operational purchase of properties, i.e. due to time pressure, the entrepreneur receives more expensive alternative financing and after purchasing the property, turns to a commercial bank to refinance the initially received loan for a longer term and a lower interest rate.
Seasonal working capital financing - the most common financing need and niche for alternative financing providers
It is hard to imagine a more seasonal business than grain farming, where almost all the company's income is concentrated in a few months, while the farm's expenses far exceed its income during the rest of the time. This situation creates an imbalance in the company's cash flow, which has been further exacerbated by the rising prices of mineral fertilizers and other materials over the past year. Therefore, spring is a particularly active time when farms plan the funds needed for the season and are actively looking for funding to do all the preparatory work for a good harvest.
Similar to long-term loans, credit lines for working capital of commercial banks will also require collateral, while unsecured bank loans often have high qualification criteria, so alternative financiers are increasingly addressing this financing need. Fast evaluation terms and lower collateral requirements are the primary reasons why, in addition to commercial bank financing, farms also use alternative financing. Often, all major farm assets already serve as collateral for a bank loan, as a result of which it is impossible to receive additional financing. It is a common practice in the non-banking sector to finance without additional collateral, which is especially appreciated by customers.
In order to make the everyday life of entrepreneurs easier, we have summarized the financiers most suitable for each agricultural company's needs in the following table: