Obtaining a loan for an agricultural project is one of the best things that can happen for a farmer who needs financing. Without funds, nothing moves on a farm. Over 30% of loans taken by sub-Saharan African (SSA) farmers are for start-up operations.

Farmers usu­ally apply for these after gaining some experience or training in their intended project. It may also happen after a farmer or farming enterprise hires an expert to manage their monetary in­vestment in agriculture.

Loans are used for:

  • purchasing farming equipment, supplies, and land,
  • refinancing an older loan,
  • funding marketing campaigns and advertising,
  • making land repairs and improve­ments,
  • investing in growth,
  • covering operational costs, and
  • rebuilding after natural disasters.

The factors that influence obtaining a loan in SSA are:

  • distance to the lender office,
  • the formality of business,
  • a farmer’s credit score, credit history, and debt-to-income ratio,
  • employment history,
  • down payment,
  • collateral,
  • period of loan approval, and loan monitoring.

Example of a table of amortisation of a load. (Courtesy of Investopedia.com)

You will need to be familiar with the terms, interest rate, principal, and loan repayment schedule. The interest rate is the amount a lender charges a borrower and is a percentage of the principal. The interest rate on a loan is typically noted on an annual basis known as the annual percentage rate (APR). The principal is the initial size of a loan – it can also be the amount still owed on a loan. A loan repayment schedule is the time frame of repaying the loan through a series of regular payments, generally known as equated monthly instalments (EMI). It includes the principal amount outstanding and the interest component. It is also called an amortisation table.

Before taking out a loan, it is impor­tant to understand the exact use of the funds. It ensures that the loan can be repaid, meaning the farmer needs to fully comprehend the agricultural project from the industry analysis to the marketing and management strategy, including the operational methods and the financial analysis (balance sheet, income statement and cash flows) as­sociated with the operation.

To lower the risk associated with defaults in repayments, some farm­ers can cover their production system with insurance, but it depends on the economic stability of the country your farm enterprise or project is situ­ated in. Having an agreement with a guarantor to cover the loan assists immensely as well.

As the agriculture sector can be unstable, every potential risk or threat should have a readily implementable mitigation strategy, and whatever strength and opportunity the project possesses should be continuously analysed.

Threats that can affect a production system include:

  • the impact of climate change,
  • the perceived threats to food and water security,
  • the reluctance of policymakers to open markets;
  • political instability;
  • any produce not moving up the value chain to value-added products;
  • the outbreak of a pest, disease, fungi and virus,
  • the changes in duty on the impor­tation
  • of agricultural inputs,
  • the changes in the taxation of agri­cultural products, and
  • price fluctuations.

These changes in SSA can occur at any moment due to the developing nature of our economies. Ensuring that the loan is paid for then consists of optimum management of the project, from the land preparation, climate analysis, staff management, pest and disease control measures, water use and chemical management, harvesting or culling techniques, packaging procedures, refrigeration, post-harvest processing, logistics, security, good maintenance and reparation of all mechanical, hydraulic, electrical installations and their infrastructure.

Other factors outside the agribusiness to consider for loan repayment are your age, gender, business experience, financial education, total household income, and total sales. The choice of the repayment method depends on many things, such as whether the loan will be repaid with the same amount every month, within a pecific period after receipt of payment for goods rendered, or within a predetermined period.

After the farmer or farming enter­prise has paid all the loan EMIs, it is advisable to contact the bank or financial institution and check if all the outstanding amounts are cleared. If everything is clear, it is best to fix a date to go and do the other formalities for the closure of the loan.