Question

1. You own a farm and grow seasonal products such as pumpkins, squash, and pears. Most of your business revenues are earned during the months of October to December. The rest of your year supports the growing process, where revenues are minimal, and expenses are high. In order to cover the expenses from January to September, you consider borrowing a short-term note from a bank for $300,000. Based on this scenario, please complete the following:

• Research the lending practices of a local bank.
• Determine the interest rate charged for a $300,000 loan.
• Determine the collateral the bank requires to secure the loan?
• Determine your overall payback amount if you were to repay the loan in less than one year.
• Choose either a payback with periodic payments or all at the end of the loan term, and compare the
• outcomes.
• After conducting your research, would you consider borrowing the money?
• What positive and negative outcomes accompany borrowing the money?

Answer 1

Answer:

The lending practices of a local bank :

• It provides loans like home loans, vehicle loans, personal loans, business loans, education loans, and agriculture or farm loan.
• The interest rates for each type of loan are different, according to the loan term period or payable period and also according to the nature of the loan.

.

The interest rate charged for $300,000 loan is 3.19% but for farm or agriculture-related loans, it is 2.250%.

The collateral bank requires for the amount of $300,000 farm loan for financing operating expenses of agriculture or farm is "the registry papers or ownership deed" of the land cost at least 90% of the proposed loan amount.

The overall payback amount if repayment of the loan is to be within 1 year : =$306,750.

.

Payback with periodic payments and repayment of all sum of the amount at the end of the loan term would be the same if the loan period is 1 year only.

(No period specified)

.

After conducting the research, the borrowing money for short term period are less effective, I would not consider taking a farm loan for the short term

.

Positive Outcomes :

• Good credit score and good credit file if you repay the loan on time.
• Good financial relations with local banks can help to get the emergency funds in times of need.

.

Negative Outcomes :

• Higher Cost
• Time-consuming procedures.

.

Step by step Explanation:

The lending practices of a local bank :

• It provides loans like home loans, vehicle loans, personal loans, business loans, education loans, and agriculture or farm loan.
• The interest rates for each type of loan are different, according to the loan term period or payable period and also according to the nature of the loan.
• Vehicle loans, Education loans, and home loans (except for construction purposes) are provided with demand draft issued directly to the vendor party while business loans, agriculture loans, and personal loans are provided through the mode of payment which the borrower prefers.
• The loan up to the limit of $2 million can be approved within 15 days (maximum), but beyond this limit, it takes at least 25 days to approve and grant the loan amount to the borrower.

.

The interest rate charged for $300,000 loan is 3.19% but for farm or agriculture-related loans, it is 2.250%. If the farm land on lease there are additional requirements of documents but interest rates would be the same.

.

The collateral bank requires for the amount of $300,000 farm loan for financing operating expenses of agriculture or farm is "the registry papers or ownership deed" of the land cost at least 90% of the proposed loan amount.

.

This means for the loan amounting to $300,000, the collateral security required by this local bank for approving the loan is $270,000 ($300,000 * 90%).

.

The overall payback amount if repayment of the loan is to be within 1 year :

= Principle + Interest

= ($300,000 * 2.250% + $300,000)

= $6,750 + $300,000

=$306,750.

.

Payback with periodic payments and repayment of all sum of the amount at the end of the loan term would be the same if the loan period is 1 year only.

(No period specified)

.

After conducting the research, the borrowing money for short term period are less effective, I would not consider taking a farm loan for the short term. Because :

• Interest paid is higher than the amount we might pay to vendors ( Principle + Interest) for the expenses till the month of September.
• Deposit of collateral security.
• Documentation hurdles and long-scrutiny process for a short term loan.

.

Borrowing the money for short term farm loan :

Positive Outcomes :

• Good credit score and good credit file if you repay the loan on time.
• Good financial relations with local banks can help to get the emergency funds in times of need.
• The organized and formal way of borrowing which provides interest expense deduction in the Income-tax assessment.
• No Unorganized market risk is involved.

.

Negative Outcomes :

• Higher Cost
• Time-consuming procedures.
• Risk on Collateral security.
• Interest rate risk.