In accessing credit to support the operations of your agribusiness, you need to understand how to use the 3 Rs of credit to your advantage. Credit refers to the contract involving a borrower who receives something valuable and promises to repay at an agreed future time/date to a lender, usually with interest. The 3 Rs is one of the essential tools which financial institutions and lenders rely on in assessing your credit worthiness and the level of risk involved in investing in your business venture.
The 3 Rs of Credit are;
Risk bearing ability of the borrower.
Returns from the investment.
Repayment capacity of the investment.
Your risk bearing ability:
Assessing the risk bearing ability of your business venture is necessary because the returns and repaying capacity analysis are made on the basis of your estimated production, price and cost components. Your risk-bearing ability also depends on the relation between the debts and assets of your business as well as its equity. A farm with less debt than asset or equity has a high-risk bearing ability and this confirms to some extent, the ability of the farmer to repay a credit facility.
It is therefore no surprise that financial institutions ignore farmers who cannot validate their business assets and other debts with their repayment plans. Proper documentation of assets also provides some level of security to lenders that their investments can be recouped in the event of defaulting in repayment.
Interests on loans serve as compensation/guarantee to lenders/investors for uncertainties and alternative use of resources. Interest in the financial circles refers to the price paid for the use of borrowed funds. Your risk bearing ability influences the interest rates a lender charges you before giving a loan and many commercial banks rate investments in agriculture as high risk, hence the high interest rates charged on such loans.
Returns from investment:
The profitability of your entire farm business proves to lenders that your business is worth their support. How does a farmer prove to potential lenders/investors that it is profitable for them to commit their resources to an agribusiness venture?
The farmer can do this by keeping accurate records, working with a business plan, accessing highly profitable markets and using efficient technologies to reduce cost. These will go a long way to prove that you have the skills to properly manage the business and generate good returns.
A good number of lenders are ready to extend additional credit facilities to agribusinesses with good returns because to some extent, it is easier for such businesses to expand production and manage more resources efficiently.
Repayment capacity:
It is essential that you know the cash inflows and outflows of your business because the lender will rely on this information to assess the ability of your business to generate enough money to service the loan while ensuring at the same time ensuring the smooth running of your business.
A poultry business, for example, can have cash inflows from the sale of eggs, day old chicks, birds, poultry manure and feathers. Its cash outflows may result from operational expenses such as marketing costs, feed, medication, debt repayment, transportation and labour, among others. If the farmer continuously experiences higher cash outflows than inflows, it becomes difficult to convince a lender that repayment terms will be strictly adhered to without exposing the business to more risk.
Your repayment capacity is dependent on the current asset to current liability ratio of the business and it includes your repayment period. The repayment period is the time taken to pay a loan in full. Loans can either be amortized or non-amortized. According to Investopedia, an amortized loan is a loan which is repaid in a series of installments on both principal and interest while a non-amortized loan requires the repayment of entire principal on the expiration of the repayment period.
Having assessed your own risk, your returns and repayment capacity, you are part of the top 10% investor-friendly businesses with the ability to compete for attractive interest rates. Evaluating your credit capacity also helps you know the level of risk your business can cushion and still remain viable. Do not wait till you need credit to evaluate your credit capacity. Do it now.