Jun 30, 201610:14 AMOpen Mic
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How guaranteed loans can help agribusiness owners
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After a turbulent first quarter dominated by sharp stock market declines and a subsequent rebound, the nation’s economic outlook is mixed amid continuing concerns over land values and commodity prices. Although the Bloomberg Commodity Index has shown some improvement — increases of 3.8% in March and 7.9% in April — it’s too early to know whether those gains signal a trend. The index, which tracks returns from raw materials such as crude oil, gold, copper, and foodstuffs, in January declined to its lowest level in at least 25 years.
There are also indications of tightened lending conditions ahead, despite sustained job growth and rising wages. Although the U.S. Small Business Administration reports a 9% year-over-year increase in loan approvals in 2016 compared to the same time in 2015, some research on lending suggests a different scenario could unfold.
According to the Federal Reserve’s most recent Senior Lending Officer Opinion Survey, demand for commercial and industrial loans declined 11.1% since December among large- and medium-sized businesses and 12.7% among small businesses. About 20% of banks surveyed expected to tighten loan standards. Although that decline is the first since 2012, it’s a signal of possible change.
With current low prices for livestock, milk, corn, and soybeans, and predictions of only moderate economic growth through 2016, as well as indications that the Federal Reserve Board might raise interest rates, federally guaranteed loans are attractive options for agribusiness owners looking to expand or improve cash flow.
Three main reasons business owners don’t take advantage of guaranteed loan programs:
- They require more paperwork.
- Fees are higher because of the government guarantee.
- Business owners are unaware guaranteed loan programs are available.
The extra paperwork and higher fees are worth considering, and long-term financing can act as an insurance policy against potential future volatility. Locking in agricultural loan rates at longer amortizations can strengthen balance sheets and help defend against lower commodity prices or declining land values.
Guaranteed loans offer advantages such as longer maturities that can be especially valuable if the economy takes a downturn. Terms for Farm Service Agency (FSA) loans can range up to 40 years, while U.S. Department of Agriculture (USDA) business loans can be for up to 30 years, fully amortized. Maturities for SBA loans are up to 25 years, also fully amortized. In addition, government guaranteed financing programs allow borrowers to lock in rates for up to 30 years, compared to only five years on conventional loans. Long-term, fully amortized loans (and especially at current low fixed interest rates) can help ensure business stability over time.