In the News

Loan Payment Options

By: Casey Beck, Logan Branch Manager

Western AgCredit offers a variety of loan products to meet the needs of our customers. This variety provides our borrowers with diverse payment options to match each operation’s cash flow schedule. The two basic loan structures offered by Western AgCredit are lines of credit and term/amortized loans.

Operating Loans/Lines of Credit

Sometimes operations may not have enough cash on hand to cover input costs incurred during an operating cycle. Lines of credit are used to provide additional capital to cover said input costs. For example, a cow/calf operation may have enough money from a November calf crop sale to cover the feed purchases, repairs, labor, etc. from December to May of the following year, but might need an operating loan to cover input costs from June to November. Interest will accrue at the stated rate on the outstanding principal balance. When the next calf crop is sold in November, the proceeds from the calf sales are used to pay the accrued interest and pay down the outstanding principal balance on the operating loan. Western AgCredit recognizes that it wouldn’t make a lot of sense for a monthly payment on a cow/calf operation that generates most of its income once a year.

Term/Amortized Loans

A term loan is typically used to finance the purchase of an asset and has a set repayment schedule. Term loans are set up to match the depreciable life of the asset being financed. Equipment loans are normally 3 – 5 years, whereas real estate loans can be as long as 30 years. Again, Western AgCredit strives to match repayment schedules with the income stream of the operation. For example, a dairy operation may need an equipment loan to purchase a loader. Usually, a dairy operation is paid twice a month for the milk produced on the operation. Therefore, a monthly loader payment for a dairy operation makes sense from a cash flow standpoint.

The loan payments for term loans include both interest and principal. Western AgCredit has two types of repayment schedules; decreasing payment plan or level payment plans. Decreasing payment plans are those with a fixed sum to principal. The principal payment is determined by dividing the principal amount by the number of payment periods. Accrued interest is paid current with each periodic payment.

Level payment plans are those with fixed payment amounts. Principal and interest are different with each payment, but the payment amount remains the same.

Sometimes, an improvement is made or an asset is purchased that will not contribute to the bottom line for months or even years. As a result, the operation may not have the cash flow initially to cover the scheduled interest and principal payment. Western AgCredit recognizes this potential need and has various loan types that require interest only payments initially followed by principal and interest payments.

If you have any questions on loan payment options, please feel free to contact your loan officer or a branch near you.