A practical guide for farmers
MAKING FINANCIAL DECISIONS How to find the best financial solutions for your agricultural business
ABOUT THE BROCHURE
About the brochure
This brochure has been developed to assist farmers in Albania, in order to provide knowledge and information that support their financial decisions, to provide an appropriate understanding of financial products and services, and to guide them in making the best decisions in relation to financial services that meet their business needs and expectations. If you are a farmer who needs a loan to invest in your agricultural business (for inputs, machinery, equipment, etc.) this brochure will provide you with guidance on how to: • analyse your investment plan and identify the financial product required for your needs; • compare the terms and conditions of the financial products that are offered; • select the financial product that meets your requirements and the best financial partner; • ascertain the accurate amount of debt; • avoid liquidity problems, • prepare your own income statement, cash flow and balance sheet; • increase your competitiveness by increasing distribution and sales.
Imprint © 2019 EFSE Development Facility
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Content
3 Understanding financial statements ....................................................... 3 Four steps to financial decsion making................................................... 7 Step 1: Start with a clear investment goal or purpose................. 8 Step 2: Assess your capacities to finance your investment plan.. 15 Introduction .....................................................................................................
Step 3: Select conditions that match your business and investment plan................................................................................
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Step 4: Select conditions that match your cash flow requirements...............................................................................
23 Other financial products for agricultural businesses .................. 25 Case study .................................................................................................. 27 Must ask questions ...................................................................................... 31 Useful contact information .................................................................. 32 Disclaimer The information contained in this document has been checked by EFSE DF with due diligence. However, EFSE DF does not assume any liability or guarantee for the timeliness, accuracy, and completeness of the information provided herein. EFSE DF reserves the right to change or amend the information provided at any time and without prior notice. EFSE DF makes no guarantees, direct or implied, as to the suitability of this document for a particular purpose or application. This document does not necessarily address every important topic or cover every aspect of the topics. The information in this document does not constitute investment, legal, tax or any other advice. It has been prepared without specific knowledge of the individual financial and other circumstances of the intended audience
INTRODUCTION | UNDERSTANDING FINANCIAL STATEMENTS
Farming and agr icultural businesses The agricultural sector in Albania is very important for the country’s economy. It has a crucial role in the country’s development and it is one of the most profitable fields to invest in Albania. Agriculture has the highest sector share in terms of employment (with approx. 50% of the workforce), but it benefits from only 4% of the total financing (credits provided by the banks and MFIs for agriculture). Regardless of continued high growth rates, agricultural productivity remains low compared to neighbouring countries. The current level of investment in the agricultural sector is low, with two of the main re-
asons for this being poor access to finance and a lack of infrastructure (especially fragmentation of agricultural land and titles of property). It is quite impossible for businesses to increase their sustainability without any means of financing. Therefore, access to finance is crucial to enable new investments in agriculture and expand agricultural activities. Especially in agriculture sector, it is essential to have sufficient funds for investment in working capital or assets. It is important to be able to undertake the purchase of inputs, equipment, machinery, livestock, saplings, etc. at the appropriate time, given the business and seasonal requirements.
Understanding financial statements Although it can seem daunting, understanding financial statements is really not too complicated. Using them effectively along with a valid sales forecast gives you a preview of good and bad times before they hit, so you can take proactive measures if necessary.
hand, cash outflows are money paid out as a result of the purchase of goods and services or various investments in the business. Outflows reduce the amount of money in the account, and inflows add money.
This section introduces you to financial statements and explains in a simple way their basic purpose.
The cash flow statement records all cash inflows and outflows to and from the business. Understanding cash flow statements is very important in agriculture which is prone to seasonality where cash inflows and outflows may be highly concentrated in certain months. Cash flow statement helps you to understand how your business activities develop and help you project how much extra cash you have available or if and when you have cash shortage. Access to available funds (cash flow) is critical because this money is used to pay for inputs required in the production system and other administrative costs. These can be direct input costs such as fertiliser, supplementary feed, workers’ wages, herbicides and fuel as well as overhead costs such as electricity, living expenses and insurance. It can also be required to pay for other commitments such as tax liabilities, goods and services tax.
How to prepare simplified financial statements
There are three basic financial statements: Cash flow, income statement and balance sheet. These reports reflect your business’ current financial position and help you to make informed business decisions. These reports are also used by financial institutions to determine if you are creditworthy and whether your investment is sustainable and efficient.
Inflows vs. Outflows
Cash inflows are cash received by a business as a result of the sales and from all other sources, such as selling of assets. On the other
Cash flow statement
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UNDERSTANDING FINANCIAL STATEMENTS
Cash flow statement Month
January
February
March
April
Total
A
Sales (products or services)
20,000
25,000
26,000
30,000
101,000
B
All business expenses, incl. repayment of outstanding loan
15,000
17,000
16,000
12,000
60,000
C
All Household Expenses
4,000
4,000
5,000
4,000
17,000
D
Total expenses (all business expenses + household expenses)
19,000
21,000
21,000
16,000
77,000
E
Net monthly incomes
1,000
4,000
5,000
14,000
24,000
Average net monthly income
6,000 All values in ALL
Income statement
The income statement, also known as a profit and loss statement, shows all income and expenses over a period of time and indicates whether a business is profitable or not. It shows what your profit on operations was for a given period e.g. one year, three months. Income is the general term for money received / sales invoiced from selling its goods or service to a customer during a par ticular period of time (usually a year). Gross income: income less cost of goods produced. It tells you how much profit is earned on your products before you take into account operational and indirect costs. Net operational income before tax is the amount of money left over after all expenses, except for tax payments and household expenses, have been deducted. Net income (profit) is money left over after all company and family expenses and tax have been paid out of revenue. Net profit reflects how much profit you actually made during the period that can be reinvested into your business.
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Income statement Monthly average Income Cost of goods produced Gross income Operational costs Net operational income before tax Taxes
Cost of goods produced (also called the cost of goods sold) is the cost(s) direct ly related to producing your product or providing your service during the period – such as seeds and fer tilizer or feed for animals, and other expenses required to obtain or create the product or provide the service.
200,000 45,000 155,000
Operational Costs are all expenses associated with running your business, such as fuel, maintenance, insurance, rent, ulitilies, seasonal workers wages, etc.
35,000 120,000 0
Household expenses
50,000
Net Profit
70,000 All values in ALL
Household expenses include all expenses that were covered by income from your business, such as food, rent, health care, personal loans etc.
UNDERSTANDING FINANCIAL STATEMENTS
The balance sheet
A balance sheet is an important tool for financial planning. In order to assess your business fully (and to be able to fully use this brochure), you will need to be able to construct a simplified balance sheet of your business. Below we have provided a short tutorial on how to prepare it for your personal use in business planning.
allows you to compare what you own, with what you owe and determine your equity (refer to section Definitions in Chapter III). How to create a simplified balance sheet Step 1: Make a list of all assets (buildings, equipment, vehicles, supplies, livestock, crops) and liabilities (debts) from both formal and informal sources related to your business that exist today.
What is a balance sheet? A balance sheet is an organized overview of all business assets (possessions) and liabilities (debts you owe) at a particular time (usually at the end of the month, quarter or at the end of the year). For that reason, the balance sheet is considered as a “photograph” of everything your business owns and owes at a specific point in time.
Step 2: Estimate the fair value of your assets. The fair value of your assets is a realistic price for which you could expect to sell the equipment, buildings, etc. A good method for determining the fair value of a piece of equipment is by comparing the prices of similar equipment for sale in the second-hand market.
The “Assets” column reflects the value of all the items you own that are used in your business. The “Liabilities” column reflects the formal and informal debts you owe. The balance sheet overview
Step 3: Place the assets and liabilities in the categories as shown in the following table. This typical balance sheet is an example and shows the format for organizing all your balance sheet account items.
Balance sheet Assets Working capital
Value
Liabilities
760,000 Short-term debts
Cash
400,000 Short-term loans from financial institutions
Stock of inputs (seeds, fertilizers, pesticide)
360,000 Other short-term debts (Informal debt)
Crops or animals to be harvested or sold Fixed assets Tractor, machines & equipment, etc. Permanent livestock or plant stock Land & buildings
23,360,00 Medium & long-term debts
300,000
300,000 0
3,000,000 Long & medium-term loans from financial institutions 360,000 Long-term loan from financial institutions for new investment 20,000,000 Other long-term debts
Total liabilities
Equity (net worth)
Total assets
Value
24,120,000 Total liabilities & equity
300,000 23,820,000 24,120,000 All values in ALL
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UNDERSTANDING FINANCIAL STATEMENTS
Typical Balance sheet account Account
Description
Assets
All items you own that are used in your business.
Cash
Money in-hand or in bank account.
Stock of inputs or supplies
Includes seedlings, fertilisers, pesticides, animals’ food, vaccines, etc.
Crops or animals to be harvested or sold (inventory)
Includes the current values of raw materials, finished goods, animals or crops to be sold during the current crop cycle.
Tractor, machines & equipment, etc
Includes irrigation and milking system, vehicles, refrigerators, tills, temporary greenhouses, farm tools, etc.
Permanent livestock or plant stock
Include all crops and animals that produce for several seasons, such as milking and reproduction livestock, orchards.
Land & buildings
Include arable land, pasture, warehouse storage, barn, green houses and any other structures used for your business.
Liabilities
Amounts that you owe, including loans, taxes and other accounts payable.
Short-term loans from financial institution
Includes loans from MFIs or banks that must be paid in less than 12 months.
Other short-term debts
Includes accounts payable to suppliers, friends or family (informal loan), unpaid wages, taxes, etc.
Long-term Liabilities
Loans from MFIs or banks with a maturity of more than 12 months. Includes bank loans, equipment loans, and other long-term financial obligations.
Other long-term debt
Loans from other sources including suppliers, friends or family (informal loans) that must be paid over a period that is longer than 12 months.
Equity
Assets – Liabilities = Equity or net worth
Keep in mind
The cash flow, income statement and balance sheet presented here have been simplified. You may see all three with many more entries than those included here. For the purpose of this brochure, we have chosen to include basic categories that are most useful for small farmers.
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FOUR STEPS TO FINANCIAL DECISION MAKING
Four steps to financial decision making It is advisable to have a healthy relationship with both, your lenders as well as your suppliers, as you may need both when running your business.
First,
start with a clear investment goal or purpose.
One of the primary and most important issues relating to agriculture finance is identifying the institution that meets your requirements. It is important to find a lender who understands your business and financing needs, therefore you will need to meet different lenders to identify the one that meets your needs or work closer with a financial adviser that understands agricultural businesses. Never make a quick decision! Whether you are dealing with crops, trees, milk or meat production, or any other activity, your business analysis process is the same. Prior to your decision, you must be sure that you have made a proper decision and that it fits with your capacities and needs.
Second,
assess your capacities to finance your investment plan; you must check whether you have the capacity to cover the loan (debt) that you want to obtain.
By following these steps, you can evaluate the strengths and weaknesses of different financial products, and their benefits or drawbacks, which will enable you to make a proper financial decision that matches your business needs and helps you to accomplish your goals.
Third,
analyze the alternatives and make a decision; you must choose the financial solution that your business needs.
Four th,
make the best choice for your business; in other words, this means make the best choice that matches your cash flow conditions.
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FOUR STEPS TO FINANCIAL DECISION MAKING
l or purpose Step I: Star t with a clear investment goa The type of loan you will want to get depends primarily on the business you want to develop and type of investment that you wish to make. There are two main types of loans and a third that combines the two types: • A working capital loan is a loan that has the purpose of financing the everyday operations of a company/farmer to purchase agriculture inputs (seeds, pesticide or fertilizers) and to cover any other operational costs (fuel, payment of worker wages and salaries, etc.). For that reason, a working capital loan should have a maturity of no more than 12 months or one crop cycle. • A fixed assets loan is used to purchase equipment (such as tractors, ploughs, combine harvester) or to finance the expansion of other long-term assets (such as land, the construction of warehouses, cattle farms, irrigation systems etc.). Fixed assets have a long lifespan and are for permanent use over several crop cycles. The maturity is usually long-term, lasting more than 24 months. • A mixed purpose loan is used for both fixed assets and working capital needs and is a combination of the two above mentioned type of loans. The maturity generally ranges from 24 to 36 months.
Keep in mind
It might happen that the price of the harvest is bought from the supplier with a lower price than the market. In this case, you don’t have the flexibility to negotiate or dictate the price of your product.
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Financing options when you need a working capital loan The two main options for financial solutions for working capital loan requirements are: considering a supplier/buyer credit; and considering the offers of financial institutions (banks and MFIs); First option: Buyer/supplier credit A product-market loan is quite an attractive product that is available not only for farmers. It can be defined as a “delay of payment” that is permitted by the creditor or supplier of raw materials, against the goods purchased from him. It is a type of contract agreed between the creditor/supplier and the farmer. In these scenarios, the farmer receives input products “free of initial charge” or has a guarantee that they will sell the agricultural products at the end of the harvest season. • Supplier credit is used by suppliers to ensure sales of their inputs. Therefore, if you have a good relationship with your suppliers, then you can be sure that you are able to get a constant supply of high quality inputs without having to make upfront payment. In this way, farmers have the possibility to delay payment until after their harvest. • Buyers credit is used by buyers to help secure product of sufficient quality and quantity. For example, to secure certain quality and quantity of fruits and vegetables for processing, vegetable processors often offer an onward contract for agricultural inputs such as seed, seedlings, fertilizers or pesticides to agricultural producers.
STEP I: DETERMINE THE TYPE OF INVESTMENTS
Advantages of using buyer/supplier credit:
• Simple credit procedure resulting in a quick or instant decision based on the relationship that has been built up with the buyer/supplier; • Limits excess cash outflow from the business and enables cash retention for business needs; • No collateral required or simply based on a written declaration/agreement; • Helps you through lean financial periods; • Additional benefits may be optional, such as a repurchase agreement for unused inputs, free delivery of inputs etc.
Disadvantages of using supplier credit:
• It is more expensive to purchase goods on supplier credit than to pay for them with upfront cash. Also this triggers higher inventory costs since you are using credit rather than cash; • Generally, not all range of inputs are available for purchase with supplier credit; • The term for repayment is relatively short, i.e. it is due shortly after the harvest; • Buyer/supplier can stipulate inflexible conditions in your contract. You may be asked to get a guarantor to back-up your credit line; • Misapplication of supplier credit may trigger the loss of goodwill and in worst circumstances it can lead to losing the buyer/supplier as well.
Second option: Working capital loan from a financial institution If you have good relationship with an input supplier who can offer you a discount on advance payment, you can get credit from a lender and use this to purchase the inputs with cash. This provides an advantage for you as it secures the discounted price from the supplier. You can also use a working capital loan to pay for items or services necessary for the ongoing operations of the business. Loan maturities usually range from six months to 3 years. Lending institutions offer flexible payment schedule of the instalments for all types of agricultural loans, based on the farmer’s income generation. They may offer grace period of 6 to 12 months depending on the loan value and the policy of the financial lender. A typical form of working capital loan is revolving facility, that is renewed regularly, each season or annually, assuming that repayment was on-time and the condition of the business is stable. An overdraft is an example of a revolving loan.
An exercise on a working capital loan is included on the next page for reference.
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STEP I: DETERMINE THE TYPE OF INVESTMENTS
Example: A working capital loan Mr. Shehi needs ALL 1,000,000 to buy agriculture inputs for corn cultivation. His supplier offers him the possibility to buy on credit on the condition that the farmer sells him his production after harvest with a price 12% lower than the market price. The alternative is to take a loan from a lender but must pay an interest rate of 18% per annum on the loan. The question is, does it make more sense to take the loan and purchase at the discounted price or should he take the inputs on credit from his supplier? Option 1: purchase on supplier credit Cost of inputs purchased on supplier credit: ALL 1,136,363 Explanation: Let’s suppose that corn price in the free market by the end of the season will be ALL 2,800/Kv. In order to repay the supplier, the farmer must sell him his product with a reduced price of -12%, so: • Market price ALL 2,800/kv; • Reduced price ALL 2,464/Kv (ALL 2,800 x (100%-12%).
Therefore, the cost of inputs purchased on supplier credit are ALL 1,136,240. Option 2: take a working capital loan Cost of inputs purchased in cash: ALL 1,000,000 Loan detail: Amount ALL 1,000,000 Interest rate: 18% per annum Interest: paid monthly Fees: 1.5% of principal amount (ALL 15,000) Maturity: 6 months Grace period: 6 months
Conclusion
The farmer must sell the supplier 405.8 kv of corn (ALL 1 mio/ALL 2,464/kv) to liquidate his credit of ALL 1,000,000.
In this case, the total cost of the inputs if purchased on supplier credit is ALL 1,136,240 and the total cost of the inputs purchased with a loan is ALL 1,106,600 (ALL 1,000,000 costs of inputs + ALL 106,600, interest rate calculated during the repayment period and other fees such as maintenance commission). Therefore, purchasing the inputs with a loan results in savings of ALL 29,763 for the farmer.
On the other hand, if the farmer would sell this quantity of corn in the market, the result would be: 405.8 kv of corn x ALL 2,800 = ALL 1,136,240.
With the same logic as above, even if the farmer would sell his production with a price 10% less than the market price, again, purchasing the inputs with a loan results in savings of ALL 4,511.
Month
March
April
May
June
July
August
Total Payable
Monthly Interest ALL
15,000
15,000
15,000
15,000
15,000
15,000
ALL 90,000
Fee (1.5%) ALL
15,000
Other commission*
1,100
ALL 15,000 100
100
100
Capital Repayment ALL
100
100
ALL 1,600
1,000,000
ALL 1,000,000
1,015,100 Total Payable * Other commissions includes: application fee which varies from 1000 – 5000 All and current account maintenance monthly commission that generally is applied in the amount of 100-200 all. Both commission are applied as per the institutions policies and the legal status of the borrower (farmer, legal entity, etc.).
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ALL 1,106,600 All values in ALL
STEP I: DETERMINE THE TYPE OF INVESTMENTS
Advantages of using a working capital loan:
• By obtaining a working capital loan from a financial institution, you may have the advantage of securing a discounted price from the supplier, since you are paying upfront; • Loans are generally cheaper than supplier credits; • Possible use of funds for additional working capital needs, such as paying salaries, purchasing fuel, or renting machinery; • The maturity is comparatively longer, which allows flexibility in terms of when you sell your harvest; • Gaining approval is easy and quick; • Generally, this type of loan is unsecured; • Fulfils agricultural specific seasonal needs; • It can be offered as a loan or as an overdraft (with more flexibility in repayment); • Possible use of funds to bridge the gap between supply payments and co-financing for agriculture projects that are subsidized by government grants; • The offer is short term, so you won’t have to worry about the burden of having a loan over a long period of time.
Disadvantages of using a working capital loan:
• Collateral may be required, depending on the loan value and lender policy, and your credit background; • Obligation to make payments in a timely matter, regardless of your immediate financial circumstances (such as temporary excess cash outflows because of potential volatility in prices and production risks that may occur); • Your credit rating may be compromised if you repay late, creating significant problems for your company in the future; • High interest rates (fixed or variable).
Why would you take a loan for inputs instead of supplier credit? You may have the option to choose between a supplier credit and an offer from a financial institution. Many suppliers sell on credit, but in addition they also offer discounts for advance cash payment for inputs. So, it can be a good option to obtain a working capital loan from a lender and buy discounted inputs with an upfront cash payment, as the interest rate applied from the financial institution is less than the costs inflicted from the supplier credit.
You need to invest in fixed assets
There are two options to obtain financial resources to acquire fixed assets — by taking a loan or using a leasing instrument. First option: Financing from a leasing company Agricultural leasing programs are typically used to finance agricultural machines or equipment, such as combines, tractors, harvesters, trucks or irrigation equipment. Leasing companies have direct relationships with equipment suppliers and are a convenient option if your business plan only involves purchase of equipment and you are under time pressure.
Advantages of financing from a leasing company:
• Very fast, usually less than one-week processing time; • Usually no additional collateral required; • Allows cash to be preserved as no large up-front expenditure required; • Better utilization of equipment, as you lease and pay for equipment only for the time you need it; • At the end of a leasing term, you may buy the equipment if you wish to keep it; • You can keep upgrading: as new equipment models become available you can upgrade to the latest model each time you take on a new lease.
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STEP I: DETERMINE THE TYPE OF INVESTMENTS
Disadvantages of financing from a leasing company: • Full costs not always clear (full coverage insurance, administrative fees and residual amount); • Generally, more expensive; • Upfront payment required, typically 20-30% of the equipment’s value; • The buyer must pay VAT (20%), meanwhile the agribusiness sector is excluded from VAT for imported equipment or vehicles. • Repayment schedules are standardised (no estimation or matching to your cash flow); • Lease payments often tied to land or equipment value rather than enterprise cash flow generation; • Generally, only available for new equipment or only slightly used equipment; • Bears all the risk of a poor season.
Second option: Loan from other financial institutions If you do not have the opportunity to obtain fixed assets through a leasing company (purchase of land or construction of supporting buildings) then the only remaining option for farmers is to get credit from financial institutions.
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Advantages of loan from other financial institutions:
• Financial institutions provide long-term finance: depending on the loan value, terms up to 12 years are possible; • Many financial institutions provide financial and technical advice and consultancy services to business firms, even dedicated structures to agribusiness; • Possibility of financing your entire investment plan; • Possibility of inclusion in governmental schemes for investment in assets or to benefit from guarantee schemes or lower interest rates; • Access to a high standard of equipment that you might not be able to afford otherwise; • Possibility to use the loan to purchase second-hand equipment or equipment that could not be obtained with the available leasing products; • More flexible repayment schedules with payments matching your cash flow; • Grace periods on capital repayment from 6 to 18 months; • More flexible collateral policies: lenders accepting personal assets and other business assets, all income is considered, e.g. private income or income from other businesses; • You preserve ownership of the assets purchased.
•
Disadvantages of a loan from other financial institutions:
• Processing time of several weeks or more; • Visits from the financial institution to your business premises; • Bankable collateral and/or additional guarantees requested; • You must have a current account with the institution and pay an application fee; • The more you borrow, the higher the risk becomes to the lender so you'll pay a higher interest rate on each subsequent loan; • You still must repay the loan even if your business fails; • Additional paperwork required during first loan application.
STEP I: DETERMINE THE TYPE OF INVESTMENTS INVESTMENTS TO INCREASE ENERGY EFFICIENCY AND SAVE COSTS
and save costs Investments to increase energy efficiency Energy efficiency (EE) is the effort to reduce the amount of energy required to provide products and services. Not only in the construction sector, but also in agribusiness, the use of appliances and equipment that fulfils the criteria of energy efficiency is available for farmers and businesses. Energy efficiency is important for establishing sustainable agriculture not only for the environment but also for the economy and for the individual financial sustainability of the farmer’s business. "Energy efficiency in agriculture" reflects changes in technology and farming management practices. Farmers can use many measures to improve energy efficiency on farms, including using tractors with greater fuel efficiency, energy-efficient combined harvesters, or multistage agricultural equipment and farming technologies that minimize costs. The use of machinery or multistage systems in agricultural production or processing presents great opportunities for reducing energy and enabling cost savings. Banks in Albania have been including the energy efficiency factor in recent years during the loan application assessment. Therefore, EE loans are offered at lower interest rates compared to non EE loans, applicable for the same client/business/purpose. As in other regional countries, in Albania it is difficult for farmers to implement projects oriented by energy efficiency principles. This is problematic mostly because of lack of necessary income and the small size of farms.
Donors and international development institutions provide most of the available funding for SMEs and individuals operating as entrepreneurs in Albania when it comes to energy efficiency programmes. Additional tools that are used within these programs offer expertise and training for beneficiaries (SMEs and individuals). Banks and MFI cooperate with donors and provide loans for agriculture that can be used for improving energy efficiency, while banks are also oriented toward providing loans for household energy efficiency. As currently few Albanian small-scale rural businesses can afford large upfront investment in renewable energy or efficiency improvements, the demand for financing is likely to increase.
Ask your bank representative whether the bank par ticipates in any energy efficiency funding programmes and which products are offered that may serve your business needs.
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INVESTMENTS TO INCREASE ENERGY EFFICIENCY AND SAVE COSTS
Good to know Smaller farmers should explore current and future energy efficiency programmes and see whether the requirements of those energy efficiency programmes can be applied to the acquisition of farm equipment. Farms have lots of equipment, and most of it uses energy. In some cases, increasing the efficiency of a single piece of equipment can result in significant energy and money savings, especially over time. In Albania, a very small number of farmers producing fruits-vegetables or winter-crop use so-called Multistage or “one-pass� farm equipment that covers multiple field preparation steps. The equipment is fuel efficient because it reduces the number of times the tractor must pass over the field by performing multiple steps in one pass over the field, for example seeding and applying fertiliser; pest control with pesticide dispensing in one-pass. Multistage equipment can be used also for livestock, for example grain processors which are designed to mill corn and other grains down to fine texture livestock and poultry feed.
Keep in mind Usually energy-efficient equipment or multistage equipment are much expensive and suitable for larger farm size and/or farms which are big enough to sell most of the production rather than using it for their own consumption.
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STEP 2: ASSESS YOUR CAPACITIES TO FINANCE YOUR INVESTMENT PLAN
e your investment plan Step 2: Assess your capacities to financ Creating a business plan is a specific challenge, especially when predicting cash flow, sales and costs. A business plan is a roadmap of your business that determines your business’s limits in terms of repayment ability and debt capacity. Lenders usually determine the maximum amount of debt they are willing to give by calculating the client’s so-called equity ratio and repayment capacity.
Definition Equity is the sum of the value of all your assets minus all your debts (both formal and informal), including debts to suppliers or private individuals. Another term for equity is net worth.
The equity ratio reflects how much of the business this client is supporting with his/her own funds or equity. The repayment capacity is the ability to pay a certain amount of money on time. It is an indicator that shows the potential you have to repay debts that derive from loans. The loan repayment capacity is calculated as the difference between incomes from farming minus farm and family expenses. Banks and MFIs calculate the instalment share as a percentage of NET monthly income. This percentage may vary from 60% to 70%.
First rule of thumb: Debt capacity
Good to know If the equity ratio reaches zero or becomes negative, this means that equity is zero or negative and that the business has debts equal to or greater than the business's total asset value. If the debt is too high and the equity ratio is too low, the business is eventually no longer economically viable. If a sale is not possible, a business with zero or negative equity typically results in bankruptcy. There needs to be a balance between taking on debt, so you can invest to boost profits, and the ability to repay debt.
Your equity ratio should never be below 30%. If you are interested in refinancing your business or getting additional capital to expand your business, it is very important to assess whether you can repay the debt of your investment from your available resources within your maximum debt capacity. The maximum debt capacity refers to the total amount of debt a business can repay in a timely manner within a specified period. This means, when you assess your maximum debt capacity, you should estimate your current equity ratio and check that your equity ratio does not fall below 30% if you decide to borrow for a new investment plan.
30%
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STEP 2: ASSESS YOUR CAPACITIES TO FINANCE YOUR INVESTMENT PLAN
Example: Calculation of equity ratio Mr. Hoxha owns a farm with a surface of 31.3 hectares agricultural land, where he cultivates fruit trees of different varieties (mostly apple). He wants to invest in the construction of a refrigerated warehouse so it will be possible for him to accumulate and preserve fruits from his farm, and from other farmers in the area. He had the idea for this investment because he considered it necessary for the collection and selection of excessive production from orchards in the area.
Based on the balance sheet, he must then calculate his current equity and equity ratio:
Current balance sheet Assets Working capital
Value
Liabilities
4,200,000 Short-term debts (≤12 month)
Cash
2,100,000
Stock of inputs (seeds, fertilizers, pesticide)
2,000,000 Debts to suppliers
Crops in the field Fixed assets
Value 1,800,000
100,000 52,000,000 Long-term debts (≥12 month)
6,700,000
Tractors
3,500,000 Loan for tractor
3,100,000
Machines & equipment
1,500,000 Loan for Land & buildings
3,600,000
Land & buildings
47,000,000
Total liabilities
8,500,000
Equity
47,700,000
Total assets
56,200,000 Total liabilities & equity
56,200,000 All values in ALL
Equity ratio =
16
Equity ALL Total value of assets
=
47,700,000
56,200,000
x
100
=84.9%
STEP 2: ASSESS YOUR CAPACITIES TO FINANCE YOUR INVESTMENT PLAN
Mr. Hoxha wants to invest in the construction of a refrigerated warehouse for the collection and preservation of fruits, with a max. capacity of 260 tons. The investment value is ALL 11,500,000 (rehabilitation of the environment and the refrigerated warehouse). To realize such an investment, he intends to apply for a loan of ALL 10,000,000 and to make up the difference from other funds at his disposal from working capital. In order to calculate the expected equity ratio after the investment is made, Mr. Hoxha must adjust his balance sheet to reflect all his assets at that point (i.e. adding the refrigerated warehouse with a capacity of 260 tons) and his liabilities – the loan of ALL 10,000,000.
The amount of equity remains the same because no funds would be contributed to the project by the owner. The expected equity ratio would change to 72%, and Mr. Hoxha has sufficient debt capacity to make his planned investment.
Current investment plan Assets
Value
Working capital
Liabilities
Value
2,700,000 Short-term debts
Cash
1,800,000
600,000
Stock of inputs (seeds, fertilizers, pesticide) Crops in the field
2,000,000 Debts to suppliers
1,800,000
100,000
Fixed assets
63,500,000 Long-term debts (≥12 month)
11,100,000
Tractors
3,500,000 Loan for tractor
3,100,000
Machines & equipment
1,500,000 Loan for Land & buildings
3,600,000
Land & buildings
47,000,000
Environment rehabilitation and refrigerating warehouse with a capacity of 260 tons.
11,500,000 Loan for investment plan
Total liabilities
Equity
Total assets
10,000,000 18,500,000 47,700,000
66,200,000 Total liabilities & equity
66,200,000 All values in ALL
Equity ratio =
Equity ALL Total value of assets
=
47,700,000
66,200,000
x
100
=72%
17
STEP 3: SELECT CONDITIONS THAT MATCH YOUR BUSINESS AND INVESTMENT PLAN
investment plan d an s es in us b ur yo ns that match Step 3: Select conditio Your investment plan should consist of products that match your needs and work towards achieving your goals. But the first step to successful investing is determining your goals and risks. When you have determined your investment plan and the financial product that suits your investment – referring to your capacities to pay back the loan – it is then the time to ask for offers from different lenders and try to choose the best one. Before you take a decision, you will need to verify the conditions of the products offered – namely the loan maturity, the interest rate and the cost of borrowing. Working capital loans Interest Rate: Working capital loans mostly have a fixed interest rate but also can be offered with a variable interest rate. Maturity: The maturity refers to the final payment date of a loan or other financial instrument, including the principal and all remaining interest. Usually working capital loan facilities are by nature short-term, ranging from one crop cycle for temporary needs, up to one to three years for permanent working capital needs. Working capital loans should have a maximum maturity of 12 months, but not more than 36 months for crops (such as some sorts of berries) that do not produce significant yields during the first year. Fixed asset loans Interest Rate: Fixed declining interest rates are offered mainly by banks for maturities longer than three or five years, while MFI offer variable interest rates. Therefore, for investment loans, it is important that you understand how a variable interest rate works.
18
Maturity: Investment loans are generally medium or long-term loans. A fixed asset investment is usually a long-term investment. The maturity of the loan should match the useful life of the asset. Medium or long-term loans are more appropriate for investments in fixed assets as the cost of the asset is usually large in comparison to the profit the asset generates; however, the asset will generate profit for many years. Mixed purpose loans Mixed purpose loans are usually for a business plan that includes both working capital and fixed asset investment. Institutions that do not offer mixed purpose loans may alternatively offer you two loans: a working capital facility and an investment loan. Interest Rate: Mixed purpose facilities could have a fixed or variable interest rate. If you need working capital and to make an investment at the same time, explain this to your partner financial institution and ask about your options to receive a mixed purpose facility or to combine different loan products to finance your business plan adequately. Maturity: Usually, the institutions that offer mixed purpose loans offer a maximum maturity of three or four years.
STEP 3: SELECT CONDITIONS THAT MATCH YOUR BUSINESS AND INVESTMENT PLAN
Understanding interest rates
Definition
An interest rate is a percentage that describes how much interest will be paid on a loan. Rates are usually quoted as an annual rate (expressed as percentage), so you can determine out how much interest will be due on any amount of money.
A fixed-rate loan is a loan where the interest rate does not change over the period of the loan.
Generally, for loans granted in ALL banks use as a reference Treasury Bond yield (TB), especially with maturity of 12 months. For loans granted in Eur the reference rate is the European Inter Bank Offered Rate (EURIBOR). Euribor is the average interbank interest rate at which European banks are prepared to lend to one another.
Variable-rate financing means that the interest rate on your loan can change based on the prime rate or another rate called an “index.” The longer the term of the loan, the riskier a variable rate loan can be for a borrower, because there is more time for rates to change.
Depending on the situation, interest can be quoted and calculated in a variety of ways. When you borrow money, you’ll pay back the original amount loaned (called the ‘principal’) plus the interest. The lenders apply interest rates as leverage for the risk they are taking in lending money. In the process of the individual risk assessment, each lender looks at the financial stability of your business (i.e. length of time in operation, profitability and liquidity), your credit history and previous relationship with financial institutions, and the quality of collateral. Your relationship with the bank is based on the strength of your business: the stronger your credit history and collateral, the more affordable the interest rate applied is. Keep in mind that when you pay interest, it does not count as a repayment of the principal.
The nominal interest rate is a basic interest rate that does not include all of the costs related to the loan, such as the application or organisational fees.
Why do variable interest rates change? The rate is variable or fluctuates because the cost to the bank of obtaining funds is constantly changing. General economic conditions, the financial environment, perceptions of risk and inflation are among the prime factors that influence the movement of interest rates.
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STEP 3: SELECT CONDITIONS THAT MATCH YOUR BUSINESS AND INVESTMENT PLAN
Effective cost of borrowing: how to choose the loan with the lowest cost
T ip 1: When comparing two offers, compare the effective interest rate or the effective cost of borrowing, rather than the nominal interest rate. The most obvious and easier way to choose a low-cost loan is by looking at the Annual Percentage Rate (APR). But how do you know you’re making the right choice? Lenders typically quote their nominal annual interest rates which do not include other costs. The effective costs of borrowing include the interest rate applied to the principal borrowed and other costs related to the loan. The effective interest rate is the one which includes the nominal interest rate plus all other costs related to a loan charged by the financial institution. All financial institutions publish their effective interest rate. Usually, but not always, all of the charges related to the loan can also be found in the repayment schedule or can be requested from the financial institution. Therefore, you should always ask the lending institution for the effective rate of the loan or how much you must pay on top of the principal taken. Other loan related costs are Administrative/Originated Fees, which are fees charged by a financial institution to a borrower to pledge resources to enter into the loan agreement with the borrower. This fee may also be referred to as a commitment fee or disbursement fee, which may vary from 0.5% to 3% of the principal amount of the relevant loan. Besides the fees charged directly by the financial institution, there may be other obligatory costs, such as life insurance, collateral insurance, the cost for contracts’ notary certification and / or registering mortgage/securing charges.
20
T ip 2: t minimizes Choose a repayment schedule tha your effective cost of bor rowing.
Before you sign the contract on your business loan, it’s critical that you understand exactly how the terms and conditions of your loan impact your cash flow, so you know how much you’ll pay and when — a so-called repayment schedule. Knowing that farms’ income is irregular, the instalments of agricultural loans should ideally match your cash flow, and thus also be irregular or seasonal payments only one to four times a year. For the same amount, maturity and effective interest rate, a loan with fewer instalments (such as a bi-annual repayment schedule) will have a higher effective cost of borrowing than a loan with more instalments (such as a quarterly or monthly repayment schedule). Which repayment schedule is most convenient for you depends on your cash flow. If possible, though you should choose more frequent repayments to reduce the effective cost of borrowing.
STEP 3: SELECT CONDITIONS THAT MATCH YOUR BUSINESS AND INVESTMENT PLAN
Maturities: How to match maturity with the investment The maturity matching is that each asset should be compensated with a debt instrument having almost the same maturity. This means a farm should finance current assets with short-term liabilities and fixed assets with long-term liabilities. For example, if you want to purchase a tractor with your working capital financing, you probably won't generate enough excess cash to pay it off in one, two or six months. But don`t rush: aren’t you then actually financing the machinery, a fixed asset, with a working capital loan facility? Shouldn’t you allow yourself a longer period to pay for this investment? This is a problem because working capital funds are the funds that need to circulate in your business, transforming from inputs into crops and then into cash and back into inputs to replant. So, if working capital is depleted or used for long term investment (which won’t generate a sufficient short-term return to replenish the funds), then you may not have enough funds available to plant your next crop.
Good to know The maturity matching approach has various advantages and disadvantages. The biggest advantages are that it maintains an optimum level of funds, saves interest costs, and has no refinancing or interest rate fluctuation risk. The main disadvantage is its difficulty in implementation.
Keep in mind Try to match the maturity of the investment with the maturity of the financing. For working capital loans, the maturity should correspond with the planting cycle that the funds are used for, and for fixed asset investment, the maturity should correspond to the expected useful life of the asset.
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STEP 3: SELECT CONDITIONS THAT MATCH YOUR BUSINESS AND INVESTMENT PLAN
Example of balance sheets with “unbalanced” and “balanced” liabilities In this balance sheet example, you may notice that the business has considerable higher short-term liabilities than working capital (short-term) assets. The farmer has taken out several short-term loans to finance the purchase of fixed assets. If the short-term facilities expire without being renewed, the farmer will have a problem in finding enough cash to finance his/her next crop or repay the short-term liabilities. In addition, the farmer faces the risk that interest rates for future credit could be higher than in the past, which in turn would increase the overall cost of financing for the purchase of the fixed assets.
Balance sheet with “balanced” liabilities
Balance sheet with “unbalanced” liabilities Assets Working capital
Value
Liabilities
1,050,000 Short-term debts Debt for input suppliers
Cash
700,000
Stock of inputs (seeds, fertilizers, pesticide)
Short-term facilities 100,000 from financial institutions
Crops in the field
250,000
Fixed assets Machines & equipment Land & buildings
1,200,000
500,000
670,000
Long-term loans from financial institutions
500,000
Medium & long-term debts Total liabilities
Equity
22
200,000
Medium & long-term debts
Working capital
1,400,000
Other short-term debts
Total assets
Value
10,070,000
9,400,000
11,120,000
Total liabilities & equity
In this balance sheet example, you may notice that the business has less short-term liabilities than working capital (short-term) assets. The farmer has taken out several short-term loans to finance the purchase of fixed assets, however, even if short term liabilities are not renewed, the business will not face difficulties in repaying its obligations.
0
Assets Working capital
Value
Liabilities
1,050,000 Short-term debts Debt for input suppliers
Cash
700,000
Stock of inputs (seeds, fertilizers, pesticide)
Short-term facilities 100,000 from financial institutions
Crops in the field
250,000
Fixed assets Machines & equipment Land & buildings
1,100,000
670,000
Long-term loans from financial institutions
500,000
Medium & long-term debts
600,000
9,400,000
Total liabilities
9,220,000
Equity
Working capital
600,000
Medium & long-term debts
Shor t-term de bts
200,000
10,070,000
Total assets
800,000
Other short-term debts
1,900,000
11,120,000
Value
11,120,000
1,900,000 9,220,000
Total liabilities & equity
11,120,000
Shor t-term debts
STEP 4: SELECT CONDITIONS THAT MATCH YOUR CASH FLOW REQUIREMENTS
hflow requirements Step 4: Select conditions that match your cas When you decide to apply for a loan it is crucial that you propose to the financial institution representative a repayment schedule that matches your activity cash flow. To achieve that, you must have a clear idea of your business cash flow, so that you can define a repayment schedule that will be easier to repay on time and corresponds to your expected cash flow. There are three aspects that you need to pay attention to when it comes to your business’s cash flow: Scheduling of payments — it is well known that agriculture businesses have higher incomes in some months and might have only expenses in other months, so payments must be planed for time periods when you have inflows to your business. It is fundamental that your financial partner understands the nature of your business, so they can make an effort to properly forecast and plan your cash-flow and instalments for months when you have enough liquidity to pay an instalment. An irregular repayment schedule typically consists of one to six annual instalments of varying or equal amounts planned for periods when you will have higher liquidity in your business according to your cash flow statement, such as after an autumn harvest. In this case, instalments may be paid bi-monthly, quarterly or bi-annually depending on your cash flow.
Second rule of thumb: Choose a repayment schedule that matches your cash flow and minimises your effective cost of borrowing Having a repayment schedule which matches your cash flow is a big advantage. At the same time, you should realize that repayment schedules also have a large impact on the total effective cost of borrowing. For the same amount, maturity and effective interest rate, a loan with only one annual instalment will have a higher effective cost of borrowing than a loan with two or more instalments.
Instalment amount — in addition to your payments being scheduled in accordance with your income generation or cash flow, it is also important to make sure you can afford to pay the instalment amounts. This means that you know that after selling your products you will have enough money to pay the loan instalments according to your agreement with your financial partner, as well as being able to replant the next crop and repay any additional loans you may have in the next period. Currency — the currency of the loan and repayment should be in the same currency as your inflows/income. If you are going to pay for the purchase of a tractor or other equipment in EUR, that doesn’t mean that the loan must be in EUR too, especially when all incomes from sales are in ALL. Avoid currency risk wherever possible, i.e. losses from fluctuations in the exchange rate by taking your loan in the same currency as your income.
Keep in mind Keep in mind that irregular repayment plans come with a higher effective cost of borrowing.
Good to know What is a grace period? A grace period is a period during which you pay only interest on your loan, but do not repay the principal. A grace period is sometimes necessary because the investment you would like to make will not generate income during the first few months or years after it goes into effect. However, you should be aware that a grace period will also increase your total effective cost of borrowing.
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STEP 4: SELECT CONDITIONS THAT MATCH YOUR CASH FLOW REQUIREMENTS
Monthly instalments: since your income may vary each month, you should consider your average monthly income. Monthly instalments are suitable for businesses such as dairy or livestock producers which have income every month. Monthly instalments may also be suitable for well diversified farm as mixed farms may have income from a different crop, animal breeding or other income year-round which allows them to comfor tably repay a monthly instalment (refer to the example in the cash flow statement).
Regular cash flow – equal monthly repayment Month
Jan
Feb
Mar
Apr
May
Jun
Total
A
Sales
20,000
25,000
26,000
30,000
28,000
30,000
159,000
B
All expenses
15,000
17,000
16,000
12,000
12,000
12,000
84,000
C
All Household Expenses
4,000
4,000
4,000
4,000
4,000
4,000
24,000
D
Total expenses
19,000
21,000
20,000
16,000
16,000
16,000
108,000
E
Net monthly incomes
1,000
4,000
6,000
14,000
12,000
14,000
51,000
Average net monthly income
8,500
Maximum instalment (70% of total net income)
5,950 All values in ALL
Irregular cash flow – repayment plan with 1 instalment in month 6 Month
Jan
Feb
Mar
Apr
May
Jun
Total
0
0
0
0
70,000
89,000
159,000
15,000
17,000
16,000
12,000
12,000
12,000
84,000
4,000
4,000
4,000
4,000
4,000
4,000
24,000 108,000
A
Sales
B
All expenses
C
All Household Expenses
D
Total expenses
19,000
21,000
20,000
16,000
16,000
16,000
E
Net monthly incomes
-19,000
-21,000
-20,000
-16,000
54,000
73,000
Maximum instalment (70% of total net income)
51,000 35,700
Irregular instalments: You should consider how much income you have accumulated since you paid your previous instalment. This type of repayment schedule is appropriate for highly seasonal types of agriculture. (refer to the example in the cash flow statement).
All values in ALL
Third rule of thumb: Maximum instalment amount Ensure that the proposed instalment does not exceed 70% of your net income Besides ensuring that the payments are scheduled for the right time, it is also important to make sure that you can afford to pay the amount of the instalment. This means that you know you will have sufficient funds after selling your crop and planting the next crop to repay your loan.
24
In the above exam ple, the farmer ch ooses an irregular repaym ent schedule becaus e he does not have income from sales in the first 4 months. Du ring this period, he has only expenses.
OTHER FINANCIAL PRODUCTS FOR AGRICULTURAL BUSINESSES
inesses Other financial products for agr icultural bus Agricultural insurance and other financial products
Government’s grants and subsidies in Agriculture
Agricultural production faces many risks. The major risks include: 1) production risk due to weather conditions, damage by pests, or even natural disasters; and 2) price risk caused by potential volatility in prices. Trade liberalization and climate change can also increase risk. Agricultural risks not only affect farmers: they affect the whole agribusiness value chain (even customers). It is advisable for farmers to take steps — in terms of changing production methods and improving their infrastructure — to mitigate risks.
To receive a grant, a farmer must firstly apply for a certain grant scheme. After preparing a business plan, the application is submitted online or to the AZHBR for review and approval. The application package is made available online for all farmers/agribusinesses. The winners of government grants can be covered/paid by the AZHBR only after the presentation of all the invoices for purchases of goods and services for the investment plan.
One option that is open to the farmer is transferring part of the risks to a third party through an insurance contract. The payment for this type of contract may be monthly, quarterly or annually in the form of premium. It is a positive approach to avoid potential and unexpected loss due to problems with crops, livestock or other property in the business.
The Ministry of Agriculture has been the largest institution supporting farmers in different sectors through the Rural and Agribusiness Development Agency (AZHBR), using various grant schemes from the government budget or via funds received from international donors (including the EU). In 2018, the total value of public support for submitted agriculture projects in the form of grants is EUR 20,000,000 for all agribusiness sectors. The primary goal of subsidies is to increase agriculture production in Albania and make it more competitive. At the same time, it aims to diversify the economic activity in rural areas and improve the food safety chain. The Government of Albania can provide supports for farmers of up to 70% of investment plans, for different sectors.
It is very important to develop an agricultural insurance system to protect farmer’s source of incomes when they are affected by yield or quality losses. Equally, it is important to raise awareness among farmers and SMEs for the existence of agricultural insurance products. There are eight insurance companies currently offering insurance of non-life products, but while most of them are licensed to offer insurance for agribusiness, only three do. This insurance can take the form of, for example: crops insurance against hail and natural disasters; drought or flood insurance; insurance of livestock from different illnesses, accidental food poisoning; greenhouse insurance; etc.
The IPARD II programme, which is a mutual programme between the Albanian Government and the EU, is going to allocate approx. EUR 94 million for Albanian farmers over the course of several years. This fund will be used as grants and interventions, as funding for supporting schemes that strengthen the capacities of the agri-food sector, and law enforcement in line with acquis communautaire/ EU legislation/regulations/etc.
25
OTHER FINANCIAL PRODUCTS FOR AGRICULTURAL BUSINESSES
Guarantee funds
Frequently SMEs face difficulties in receiving loans due to insufficient or lack of collateral. Guarantee funds are financial instruments that offer the possibility of guarantees as collateral thus encouraging lending from financial institutions to small and medium enterprises. However, guarantee funds have a cost, which is paid through the fees charged and/or subsidized by the government or a donor. National Guarantee Fund – EBRD The National Guarantee Fund is a product of the cooperation between the Albanian Government and the European Bank for Reconstruction and Development (EBRD). This fund is an instrument that guarantees loans for financial institutions by covering the risk of loan repayment, thus stimulating banks to increase lending to the economy. The EBRD, working closely with the government and with the banks and financial institutions, created an Agribusiness Financing Facility, which would share the credit risk among three parties: (1) the commercial bank or microfinance institution; (2) the Government of Albania through the National Guarantee Fund, and (3) the EBRD. In addition to financing instruments, the programme also includes technical assistance for capacity-building at participating financial institutions to expand their lending to the sector as well as advisory services for agribusiness borrowers. For more information ask the representative of the financial institution if it cooperates with EBRD.
26
Italian – Albanian Programme for the development of SMEs This is a mutual programme of the Italian Government and the Albanian Government to support financially with loans that apply low interest rates (up to 3% for EUR financing and up to 4% for ALL financing) for SME investment projects that invest in the purchase of machineries, equipment and services of Italian origins. The programme has three important financial instruments: (1) a credit line; (2) the Albanian Guarantee Fund, which offers a collateral type of guarantee, by covering 60% of the potential risk in loan repayment, and (3) a programme for business support and technical assistance Financing from the credit line and the Albanian Guarantee Fund (AGF) is achieved through banks and MFIs that are partners of the programme. For more information ask the representative of the financial institution. Rural Credit Guarantee Foundation (RCGF) The RCGF is a foundation supported by the European Union, the Ministry of Agriculture and Water Resources and the KfW German Development Bank. The mission of RCGF is to offer guarantees in the form of collateral in cooperation with banks and MFIs for small and medium enterprises. The guarantee scheme is offered specifically for agriculture producers and processors, for both working capital and fixed asset investments. The guarantee covers the risk of default of up to 50% of the finance amount with no commission or additional expenses for businesses.
CASE STUDY
Case study
Offer fro
The following case study walks you through all the steps for making an investment.
Step 1: Star t with a clear investment goal or purpose
After discussing his collateral situation, Mr. Myrtaj agrees to put as collateral some fixed assets (land property, tractor, machines & equipment’s). Therefore Mr. Myrtaj asked for two different offers from the financial institutions in order that he can compare and make the best choice.
* Treasury Bond 12m = 2.5% on date of calculation.
#1
00,000 LL 12,0 A : t n u o + 6%, 12 M* Loan am d n o B reasury rate: T t s is. e r e t In ual bas n n a % 9 minimum onths y: 42 m it st). r u t a n reque o p Loan m u le ib 0,000 th poss : ALL 12 (60 mon n io s is omm nts ement c instalme r Disburs la u g e e: Ir r ent mod ember) Repaym er, Nov b o t c O May & (Apr il, : 11.17 % st rate e r e t in e 38,000 Effectiv ALL 1,0 : t n u o nt am ost of Instalme ective c f f e ll a r ees/Ove ,689 Total f L 2,652 L A : g in bor row
Mr. Myrtaj is a long-term farmer of vegetable cultivation in solar greenhouses. To undertake this activity, the farmer and his family own 2.1 ha of land that may be exploited, from which 1.5 ha are covered with a solar greenhouse. His farm is specialised in the production of different vegetables such as: tomato, cucumber, peppers, salad, eggplant, squash, etc.
Considering that Mr. Myrtaj has been working in this activity for about 10 years, by producing organic vegetables in a protected environment and has had success, he has decided to invest in fixed assets, by increasing the greenhouse surface with additional 0.6 ha in his property the enlargement of his greenhouse. Through this investment he aims to have a solar greenhouse with modern conditions for the cultivation of tomatoes, cucumber, and peppers. The total surface of the new greenhouse will be 0.6 ha and for that he needs financing of ALL 12,000,000.
titution
cial ins m finan
Offer f
rom fin
ancial
instit
ution # Loan a 2 mount : ALL Interes 12 ,000,0 t rate : Trea 00 minimu s u r y m 8 % Bond 12 M* annua Loan m l basis + 5%, . atur ity : 60 m Disbur onths semen t comm ission: Repay ment m 1% of the am o de: bi(quar t ount annua erly pa l payme yments n t s Effect possib ive int le upo erest n requ rate: 8 est) Instalm .58% ent am ount: ALL 1, Total 479,39 fees/O 0 v e r all eff bor row ective ing: A cost o LL 2,9 f 14,162 27
CASE STUDY
Step 2: Assess your capacities to finance your business
Now he must calculate his expected equity ratio, assuming he takes a loan of ALL 12,000,000 from a financial institution.
Now that Mr. Myrtaj has decided on a concrete investment plan, he must firstly check his equity ratio to test if his business can support the planned debt that he will be taking on. Mr. Myrtaj already has an estimated balance sheet based on his accounting information and his own estimates. First, he calculates his current equity ratio.
Current balance sheet Assets
Value
Working capital Cash
Liabilities
3,400,000 Short-term debts 1,500,000
Stock of inputs (seeds, fertilizers, pesticide) Crops in the field Fixed assets
Debt for input suppliers
1,200,000 Short-term facilities from financial 700,000 institutions 20,900,000
Medium & long-term debts
Tractors
2,500,000
Machines & equipment
Long-term loans from 2,400,000 financial institutions
Land & buildings
Value 2,200,000
Assets 1,800,000 4,000,000
4,000,000
Total liabilities
6,200,000
Equity
18,100,000
Total liabilities & equity
24,300,000 All values in ALL
Equity ratio =
Value
Working capital Cash
Equity ALL
18,100,000 = x 100 = Total value of as 74.5% sets 24,300,000
His equity ratio is above the 30% threshold.
Liabilities
3,400,000 Short-term debts 1,500,000
Stock of inputs (seeds, fertilizers, pesticide) Crops in the field
16,000,000
24,300,000
Expected balance sheet
400,000
Total assets
To do this, he takes the total assets from his balance sheet and adds the value of the investment ALL 12,000,000 to the fixed asset section (since the investment will be provide 0.6 Ha of greenhouse) to reach a new total asset of ALL 36,300,000. Then he must also add the corresponding liability of ALL 12,000,000 to the medium and long-term loans from financial institutions since it has a maturity of >24 months to come to the new total liabilities of ALL 18,000,000. Now that he has adjusted his balance sheet, he can calculate the expected equity ratio.
Debt for input suppliers
1,200,000 Short-term facilities from financial 700,000 institutions
Value 2,200,000 400,000 1,800,000
Medium & long-term debts
16,000,000
Tractors
2,500,000
Machines & equipment
Long & medium-term 2,400,000 loans from financial institutions
4,000,000
Fixed assets
32,900,000
Land & buildings
16,000,000
New Investment Construction of 0.6 ha solar greenhouse
Long-term loan from 12,000,000 financial institutions for new investment
Total liabilities
Equity
Total assets
Equity ratio =
36,300,000
Equity ALL
12,000,000 18,200,000 18,100,000
Total liabilities & equity
18,100,000
36,300,000 All values in ALL
= x 100 = Total value of as 49.9% sets 36,300,000
The equity ratio is still comfortably above the 30% threshold. 28
CASE STUDY
Step 3: Select conditions that match your business and investment plan
The interest rate, maturity and effective cost of borrowing: The interest rate offer is variable for the investment Mr. Myrtaj would like to make. Although the effective interest rate from institution #2 is lower (8.58%), the borrowing total effective cost is approx. ALL 261,473 more expensive than the offer from financial institution #1 with an effective interest rate 11.17%. This is due to the fact that the offer from financial institution #2 has a significantly longer maturity (60 months) compared to the offer from financial institution #1 (42 months). So, the offer from institution #1 is ALL 261,473 cheaper. To double-check that the three-year maturity matches his balance sheet structure, he looks at the expected balance sheet he made in step 2. His short-term debts (ALL 2,200,000) do not exceed his working capital (ALL 3,400,000), and his medium- & long-term debts (ALL 16,000,000) are also less than the value of his total fixed assets (ALL 32,900,000). The above-mentioned indicators show a stable financial situation, which gives Mr. Myrtaj the security that he will not face refinancing problems. Although financial institution #2 offers a slightly better interest rate, institution #1 is offering him a lower effective cost of borrowing by offering him the option to repay the loan in 42 months with irregular payments (in months: April, May & October, November). He also feels that the representative of financial Institution #1 understands agriculture to a greater degree and has reassured him that in case of any problems, institution #1 would be more flexible in solving the problems.
Step 4: Select conditions that matches your cash flow requirements
In step 4, Mr. Myrtaj needs to make sure that the repayment schedule suits his cash inflows. Repayment schedule: After the financial institution processes his application, they suggest irregular payments, four payments per year (two payments in April, May and two other payments in October and November, months for which he is aware that has higher incomes). Instalment amount: To confirm the instalment amount, he double checks his accounts and records for past purchases, sale of crops, receipts and other sources, as well as for VAT payments and reimbursements from last year. Due to the new investment, this year he plans to increase number of hectares for crops (which includes the new greenhouse of 0.6 ha). At the end of July of the previous year, after all inflows and outflows for replanting, Mr. Myrtaj had about ALL 3,500,000 left over from vegetables, which he was able to reinvest. In November of the previous year, after paying all debts, he had ALL 6,000,000 left over from vegetable cultivation to reinvest. Considering an instalment amount of ALL 1,038,000 (in total 4 instalments/year) for a loan with a maturity of 42 months, Mr. Myrtaj realizes that he can easily repay the loan and have some cash left over for other needs that may come up. Currency: All his income is in ALL. The payment for the loan amount will be in ALL.
Result: A loan from financial inst itution #1 for ALL 12,000,000 with an interest rate of 9%, a maturity of 42 months, and an effective interest rate of 11.17%. Irregular payments of ALL 1,038,000 are to be made in April, May and October, November. The overall effe ctive cost of borrowing is ALL 2,652,689. The collateral is fixed assets (land property, tractor, machines & other business equipment). Total assets value set as collateral (ALL 20.2 mill ion) to cover the loan (ALL 12 million) to the amount of 168%.
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FLOWCHART FOR PROFESSIONAL FINANCIAL DECISION-MAKING IN FOUR STEPS
n-making in four steps Flowchar t for professional financial decisio e od decisions ar Remember, go ion, at good inform made based on ve ha impor tant to so it is highly tion. a solid founda
Step 1: Identify the type of investment you would like to make • Are you interested in working capital, fixed assets or both? • Which institutions offer financing for the type of investment you would like to make? • Which financial product best suits your business plan?
Step 2: Estimate your capacity to finance your business plan • You should double check that your business can comfortably borrow this amount without running into potential difficulties. • A good rule of thumb is to remember that you should maintain your equity ratio above 30% all the time.
Step 3: Select conditions that match your business and investment • Make sure that your financial institution offers you an appropriate product for your investment. • Remember that the maturity of your financing should match the maturity of your investment. • Negotiate with your financial partner to finance a fixed asset investment with longer-term financing at affordable rates to ensure that you do not run into liquidity problems in the future.
Step 4: Select conditions that match your cash flow • Make sure that your repayment schedule matches your cash flow. • Have the capacity to repay the amount. • A good rule of thumb is to only accept a loan with repayment schedule that corresponds with the time and currency of your cash inflows. • Additionally, in your own projection calculations, you should always allow yourself to have extra funds available after paying all your debts for future unexpected needs or investments.
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MUST ASK QUESTIONS
Must ask questions Below you will find a checklist of important questions that you should discuss with your financial institution before making your financing decision.
Does the financial institu tion have knowledgeab le staff in agribusiness in general and specifically my business (such as planti ng, harvest and the price of my crops or livestock? What documents does the financial institution required me to provide? How quickly can the fin ancial institution provid ea response to my applicat ion? Does the representative of the financial institutio n clearly explain the spe cific purpose, advantag es and costs of the different products they offer? Does the financial institu tion offer flexible repayment arrangements in the event of harvest pro blems or natural disasters ? Are there other special financial products that are affordable and could be beneficial for my business , such as guarantee funds or additional insurance ? What criteria does the ba nk apply when assessing if I can use a specific fin ancial product? Is my fin ancial situation, collatera l and/or relationship wit h the bank considered? Does my partner finan cial institution offer me repayment schedule optio ns that match my cas h flow?
Does the financial ins titution make an indepth assessment of my business or only look at my financial statemen ts? How does my partner financial institution’s offer look in compariso n to other financial institutions’ offers or suppli er credit? Do I have the necessary information to make a comparison and make an appropriate decision between all the off ers? Are the fixed or variable interest rates offered for the financing suitab le for my business plan? Have I compared and weighed the advantages and risks of taking the fixed or variable interest rate? What are the total effect ive costs of borrowing of each of the offers received? Are there other fees or expenses that I must pay, such as life/collatera l insurance? Does the maturity offer match the maturity of my investment? Does the maturity offere d allow me enough time to comfortably rep ay the loan?
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If you would like to see more details on products and programmes offered in Albania please visit the website of
Albanian Association of Banks www.aab.al European Fund for Southeast Europe www.efse.lu Rural and Agribusiness Development Agency (AZHBR) http://azhbr.gov.al/ Albanian Guarantee Fund (AGF) https://www.prodaps.al/index.php/en/sme-financing/sme-guarantee-fund Rural Credit Guarantee Foundation (RCGF) http://rcgf.al/
Sound financial decisions are key to business success. We are confident that the advice given in this brochure, coupled with advice and support from your financial institution, will help you to make the right decisions.