Quiz 9 Flashcards
What is a Self-Liquidating Loan (SLL)?
made for the purpose of generating sufficient income to repay the loan within maturity period
Conditions of SLL
- Assets return over its life > loan principal plus interest
- Set note maturity & repayment schedule so cash generated by investment makes payments
Should SLL’s absorb the firms liquidity?
NO
Assets to be financed
-Current/Operating
-Depreciable
-Land
Characteristics of Operating Inputs
- Generally “used up” or converted to other forms; not carried from one year to another
- They tend to have a high MVP; tends to fall quickly as input is used
- High-priority claim b/c lack of financing could terminate production
- Seasonality of operating inputs arise from seasonality of farm production
Result in Farmer’s urgent need to:
- Secure sufficient financing to acquire the annual input for profitable production;
- Obtain appropriate financing terms; and
- Hold adequate reserves of credit (or other assets) to cope with unexpected needs for additional op. Units
Types of Operating Loans
- Regular (standard)
- Non-revolving line of credit
- Revolving line of credit
Standard Operating Loan
Separate borrowing transactions and notes each time financing is needed
What should you agree on for each transaction of a Standard Operating Loan?
-loan purpose
-loan size
-interest rate
-repayment date
Non-revolving Line of Credit
Lender agree at the beginning of the planning period to supply the operating funds at the times and in the amounts indicated in a cash flow budget
Revolving Line of Credit
The lender and the borrower agree on a maximum line of credit for the next planning period
Are revolving line of credits often used by feedlots and broiler operations?
YES
What kinds of borrowers are offered revolving lines of credit?
borrowers who provide accurate detailed and reliable cash flow budgets and who exhibit superior financial performance
Production loan interest calculation
I = P x i x T
I= interest paid
i= interest rate
T= fraction of the year that the loan is outstanding
Financing Depreciable Assets
-machinery, equipment and breeding livestock
-assets used over many years-capital cost is charged over the economic life of the asset
-significant contribution to income generating capacity of firm
-new technology & economies of size often involved
Types of Amortized Repayment Plans
-Constant Payment
-Constant Payment on Principal
-Balloon Payment
Constant Payment
Total payment in each period remains constant over term of loab
Constant Payment on Principal
Equal payment on principal occurs each period
Balloon Payment
Total payment remains constant during first years, w/ remaining balance due in a lump sum
Balloon Notes Pros
-generally lower interest rates and monthly payments
-may qualify for larger loan amount
-plan to sell asset before loan term ends
-expect large amount of capital before term ends
Balloon Note Cons
-little principal pay down; large lump sum payoff
-if keep asset, must refinance
-what happened to interest rates or credit rating in interim?
Sources of Loan Repayment
-Operating line of credit
-non real estate loans for depreciable assets
-real estate loans
Operating line of credit
Can be repaid from funds set aside to repay cash operating expenses
Non-real estate loans for depreciable assets
Can be repaid on schedule from funds set aside to service depreciation
