Agribusiness Planning & Analysis: Credit and Loans · Agribusiness Planning & Analysis AP6 Credit...

Agribusiness Planning & Analysis AP6 Credit and Loans

Agribusiness Planning & Analysis: Credit and Loans Notes Page

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Types of Loans

Money should be borrowed…

Factors that influence how much a business can safely borrow

Leverage



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Credit Instruments

Interest

Simple Interest

Compound Interest



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Amortized Loan


Agribusiness Planning & Analysis: Credit and Loans AP6.1

Types of Loans

SOURCE TYPE OF LOAN LOAN CHARACTERISTICS

Farm Credit System

Commercial Banks

Savings and Loans

Government Agency:

Farm Service Agency

Government Agency:

Small Business

Administration

Insurance Companies

Venture Capital

Dealers/Suppliers

Individuals


Agribusiness Planning & Analysis: Credit and Loans AP6.1 KEY

Types of Loans

SOURCE TYPE OF LOAN LOAN CHARACTERISTICS

Farm Credit System Short, intermediate,

and long-term loans

Provides short, intermediate and long-term loans for land, equipment, inventory,

business assets, and operating loans for production agriculture and agribusinesses

Commercial Banks Short, intermediate,

and long-term loans

Loan money for almost anything – real estate, inventory, capital assets, etc.

Payment schedule requires a single payment or periodic payments of interest and

principal

Savings and Loans Long-term loans Real estate, housing, etc.

Government Agency:

Farm Service Agency

Provides direct and government-guaranteed farm loans to persons engaged in

agricultural production who will be owner(s) or operators of an agricultural

production operation or facility when the loan is closed

Makes loans for farm ownership, soil and water conservation improvements,

operating expenses, and emergency purposes

Government Agency:

Small Business

Administration

Short, intermediate,

and long-term loans

Primarily guarantees loans made by private lenders to entrepreneurs and small

businesses

Insurance Companies Short, intermediate,

and long-term loans

Allow individuals to borrow against the cash surrender value of their life insurance

policy to make purchase

Venture Capital Money that can be invested in the ownership of a business

May involve selling stock on the open market to investors or taking on partners

Dealers/Suppliers Short, intermediate,

and long-term loans

Loan almost exclusively on the product dealer is selling:

Cars, tractors, feed, fertilizer, greenhouse, etc.

Individuals Short, intermediate,

and long-term loans

Loaned primarily for the sale of real estate with owner financing personal loans to

relations and friends



Simple Interest

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p = r = t =

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p = r = t =

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p = r = t =

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p = r = t =

i =

p = r = t =

i =

p = r = t =

i =

p = r = t =

i =



Compound Interest

p = r = y = x =

A =

p = r = y = x =

A =

p = r = y = x =

A =

p = r = y = x =

A =

p = r = y = x =

A =

p = r = y = x =

A =

p = r = y = x =

A =

p = r = y = x =

A =



Calculating Interest

Jared is buying a new car and plans to take out a loan from the bank. He is taking out a 5-year

loan for $12,000 at 7% interest. What would the simple interest after six months be?

A farmer is purchasing a new baler at a cost of $26,000. His dealer will finance the baler under

the following terms: 10% down payment with the balance repaid in equal payments over the

next 6 years at 7% APR. How much interest will the farmer pay the first year of the loan?

On March 1, Anna borrowed $3,000 to buy bedding plants. On October 1 of the same year, she

repaid the $3,000 along with $131.25 interest. What annual interest rate did Anna pay?

On March 1, Kate borrowed $25,000 to plant corn. On November 1 of the same year, she repaid

the $25,000 along with $1,541.67 interest. What annual interest rate did she pay?

A $50,000 loan amortized at 8% interest for 20 years yields annual payments of $5,092.61.

How much of the first year’s payment is principal?

For the above loan of $50,000, if the 20th and final payment includes $377.23 interest, what was

the outstanding principal balance after the 19th payment?

For the above loan of $50,000, how much total interest is paid over the life of the loan?



Complete the amortized loan chart for 20-year, $50,000 loan at 8% interest on the previous page.

Year Principal Interest P + I Loan Balance

1 $5,092.61

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

TOTALS



Calculating Interest

Jared is buying a new car and plans to take out a loan from the bank. He is taking out a 5-year

loan for $12,000 at 7% interest. What would the simple interest after six months be?

I = prt

12,000 x .07 x .5 = $420

A farmer is purchasing a new baler at a cost of $26,000. His dealer will finance the baler under

the following terms: 10% down payment with the balance repaid in equal payments over the

next 6 years at 7% APR. How much interest will the farmer pay the first year of the loan?

$26,000 x .10 = $2,600 down payment

$26,000 - $2,600 = $23,400

$23,400 x .07 = $1,638

On March 1, Anna borrowed $3,000 to buy bedding plants. On October 1 of the same year, she

repaid the $3,000 along with $131.25 interest. What annual interest rate did Anna pay?

Figure loan length = March 1 – October 1 = 7 months

131.25 / 7 months = $18.75 paid each month

$18.75 x 12 to figure annual rate = $225

$225 / $3,000 = .075 = 7.5%

On March 1, Kate borrowed $25,000 to plant corn. On November 1 of the same year, she repaid

the $25,000 along with $1,541.67 interest. What annual interest rate did she pay?

Loan length = 8 months

$1,541.67 / 8 months = $192.71 per month

$192.71 x 12 = $2,312.52

$2,312.52 / $25,000 = .0925 = 9.25%

A $50,000 loan amortized at 8% interest for 20 years yields annual payments of $5,092.61.

How much of the first year’s payment is principal?

$50,000 x .08 = $4,000 interest paid in first year

$5,092.61 - $4,000 = $1,092.61

For the above loan of $50,000, if the 20th and final payment includes $377.23 interest, what was

the outstanding principal balance after the 19th payment?

Amortized loan, so all loan payments are $5,092.61 as stated above

$5,092.61 - $377.23 = $4,715.38

For the above loan of $50,000, how much total interest is paid over the life of the loan?

Annual payments of $5,092.61 for 20 years = $101,852.20

$101,852.20 - $50,000 (loan amount) = $51,852.20 total interest paid



Complete the amortized loan chart for 20-year, $50,000 loan at 8% interest on the previous page.

Year Principal Interest P + I Loan Balance

1 $5,092.61

2 $5,092.61

3 $5,092.61

4 $5,092.61

5 $5,092.61

6 $5,092.61

7 $5,092.61

8 $5,092.61

9 $5,092.61

10 $5,092.61

11 $5,092.61

12 $5,092.61

13 $5,092.61

14 $5,092.61

15 $5,092.61

16 $5,092.61

17 $5,092.61

18 $5,092.61

19 $5,092.61

20 $5,092.61

TOTALS



Credit and Loan Info Gram

Create the info grams to teach the following concepts:

1. Types of loans, liability ratio, leverage, and its benefit to a business

2. Credit institutions and types of loans

3. Interest

Register for a free account on http://infogr.am/. Get started by choosing any format for each of

the info grams. When finished, click “share” and then “share privately.” E-mail link to teacher

at ___________________________________.

Info Gram Scoring Guide

Info Gram #1

Info gram adequately teaches types of loans, liability ratio, leverage, and its benefit to a business

20 15 10 5 0

Info gram is neat with organized information that is easy to understand

20 15 10 5 0

Info Gram #2

Info gram adequately teaches about credit institutions and types of loans

20 15 10 5 0


20 15 10 5 0

Info Gram #3

Info gram adequately teaches about interest

20 15 10 5 0


20 15 10 5 0

Total: _____________________ / 120 points

http://infogr.am/



Credit and Loans Alternative Evaluation

1. It is profitable for a business to borrow money to expand when the borrowed money

____________________.

a. Returns more than the cost of borrowing money

b. Can be secured at a low interest rate

c. Can improve the level of production

d. Will increase volume of business

2. A bill of lading is a ______________________.

a. Receipt for a good in transit

b. Contract specifying terms and payments

c. Written promise to pay

d. Receipts for stored grain

3. Leverage _______________________________.

a. Is the use of borrowed funds with one’s own to increase buying power

b. Raises rate of return if profitable

c. Results in larger loss if not profitable

d. All of the above

4. Which of the following is a source for a loan?

a. Farm Credit System

b. Life insurance company

c. Individuals

d. All of the above

5. When borrowing money, it is important to compare the _________________________ to

determine the true interest rate.

a. Annual percentage rate

b. Simple interest rate

c. Discounted interest rate

d. Compounded interest rate

6. How is simple interest figured?

7. What is compound interest?

8. What is an amortized loan?

9. Jared is buying a new car and plans to take out a loan from the bank. He is taking out a

5-year loan for $12,000 at 7% interest. The simple interest after six months would be?



10. On March 1, Kate borrowed $25,000 to plant corn. On November 1 of the same year, she

repaid the $25,000 along with $1,541.67 interest. What annual interest rate did she pay?

11. A $50,000 loan amortized at 8% interest for 20 years yields annual payments of

$5,092.61. How much of the first year’s payment is principal?

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