At one point or another, your farm or agricultural operation will need to borrow money. At KMSC Law we can provide you with information on different financing options and help draft and negotiate documents that reflect your intentions and protect your interests.
There are various reasons why financing may be required, including:
- for working capital to fund inputs or pay wages;
- for a particular acquisition such as land or a new piece of equipment;
- to pay out existing debt and refinance; or
- to respond to a financial emergency.
Methods of Financing
The answer to why you are borrowing will significantly influence the type of loan that is right for you. Additionally, the size and creditworthiness of the borrower and amount of money required will dictate the type of financing available. The following are some examples of financing methods that may be helpful to your operation.
There are many different types of bank loans, but the most common are a term loan and a revolving credit loan. A term loan provides an agreed upon sum over a set period (the term) with full payment being due upon expiry of the term. This provides the borrower with real money up front and a predetermined payment schedule. A common example of a term loan is a mortgage. Unlike revolving loans, term loans cannot be re-borrowed once repaid. A revolving credit loan, or operating loan, offers flexibility to the borrower as funds may be drawn at any time throughout the term and repaid amounts can be re-borrowed, unless the amount of the loan is reduced with repayment.
All loans are either secured or unsecured. Banks will require security from borrowers in the form of a personal guarantee or a comprehensive security package that allows the bank to enforce its interest upon certain assets if a default occurs.
Equipment financing is distinct from traditional bank loans in that, even though the creditworthiness of the borrower is important, the primary determining factor is the value of the piece of equipment itself. Common equipment finance structures include leases (true and finance), loan and security agreements and conditional sale agreements.
When making an acquisition, the seller, or “vendor”, may be willing to finance a portion of the purchase price by allowing the buyer to defer payment in exchange for a security interest over the buyer’s assets. This is commonly referred to as a “vendor take back” and it provides simplicity in that it is a private agreement between the buyer and seller.
If you’re looking to enter into a financing arrangement, contact us at KMSC Law to discuss what is right for you.