How to apply for a loan

May 2018

What is a loan? A loan implies that you want to or need to buy something, but you do not have enough money of your own available and then you borrow money from somebody else who has money available and is willing to lend you the money.

You are in the agricultural farming business to make money (profit) to pay all your living expenses. The profit is your salary. The person who is in the business of lending money to other people also wants to make a profit. How do they make money? They charge you a fee, called interest, that you normally must pay them in addition to repaying the money you have borrowed.

There is a saying – ‘the best debt is cash’ – but unfortunately in agriculture it is very difficult to farm on a cash basis. For one, normally the production cycles of most of the enterprises are long. A maize farmer plants his crop in November/December of one year and sells his crop during June/July of the following year. Not many farmers have enough cash available to produce the crop and pay all other expenses – overhead expenses – for a couple of months. In agriculture we also experience that there is a need for money to replace implements, expand your business, and so forth, which can be rather expensive.

Therefore, there is a need or demand for money and there are businesses who are willing to supply money. These businesses are known as financial institutions (the fancy term) or commercial lenders, or in lay-man’s terms known as banks. They ‘sell’ money at a price, called interest, to make a profit. They can only make a profit if the person who borrows the money from them, pays back the money plus the interest within in a certain period.

Thus, should you need money, you need to apply to a financial institution to borrow (buy) the money from them and you will have to meet certain criteria before they will borrow (sell) the money to you.

According to Dr Langelihle Simela from Absa AgriBusiness who spoke at the 111th AVI Africa Poultry Conference in Johannesburg and as reported in the Farmer’s Weekly of 7 July 2017, good record-keeping, good production practises, hand-on management and leadership experience are what commercial lenders consider important when assessing emerging producers’ business loan applications.

You will notice that all these aspects have been discussed in previous articles on management and some even more than once, for instance record-keeping. Regarding record-keeping there is a saying ‘The bluntest pencil is sharper than the sharpest memory’, implicating you cannot remember everything, you must keep records.

Other factors that will be considered by the commercial lenders are financial statements to evaluate whether your business is improving. They will also consider your application favourably if you have a fixed market for your production, especially strengthened by an off-take agreement. Sufficient cash-flow is another important aspect – will you have cash available on the dates of repayments. Being able to make a personal contribution (pay a deposit) will show the bank that you are committed to building a successful business. The location of a business also plays a role – the closer you are to good markets which reduces transport costs is considered favourably by lenders.

Because the need for money differs, several types of loans are available. Such as bond loans for purchasing land, production loans and medium-term loans for purchasing tractors or vehicles or personal loans. For each type of loan, the emphasis placed on the factors that the banks consider differs. For the detail of this you must consult with your service provider.

Another factor considered by the financial institutions is security. The lender will consider your application much more positive if you are able to secure the loan with for instance land. If you buy a tractor using the appropriate loan, the tractor will be secured to cover the loan should the need arise. Your crop could also be secured for a production loan and you will then be obliged to deliver the crop to the lender or a nominee of them. The implication of this is, should you not be able to repay the loan, the bank will repossess the item that is offered for security and attempt to sell it to recover the outstanding funds.

Unfortunately, since the beginning of this year there were two developments that will affect the acquiring of loans negatively. First, during January a report regarding a financial institution surfaced. The report indicated that the financial institution apparently did not administer the approval of loans correctly. Then during February there were the political utterances of expropriation of land without compensation. One can only foresee that banks will become stricter in future when considering the application for loans making it more difficult to acquire a loan. 

Article submitted by Marius Greyling, Pula Imvula contributor. For more information, send an email to mariusg@mcgacc.co.za.

Publication: May 2018

Section: Pula/Imvula