Farm Credit Lending Terminology

Transcription

1 Farm Credit Lending Terminlgy Amrtized lan - A lan with a series f regularly scheduled payments that include bth interest and partial repayment f principal. Equal payments - Payments are f equal size with declining interest and increasing principal. Equal principal payments - Equal principal payments with declining interest payments. Interest decreases because the unpaid balance decreases. Because interest payments decrease, ttal payments decrease. Assets - The items and prperty wned r cntrlled by an individual r business that have cmmercial r exchange value. Items may als include claims against thers. All assets are reprted n a balance sheet at market r cst value less accumulated depreciatin. Assets are nrmally divided int categries based n their useful life. Current assets - Assets that will be used r cnverted int cash within ne year. Als called liquid assets. Intermediate assets - Assets with useful lives f ne t ten years. Their sale will affect the future incme ptential f the business. Lng-term assets - Permanent assets with useful lives in excess f 10 years. Als called fixed assets. Smetimes bth intermediate and lng term assets are called fixed assets. Financial assets - Intangible assets such as cash and savings. Real assets - Asset that are tangible r physical in nature such as land, machinery, and livestck. Balance sheet Is a listing f all assets and liabilities at a given pint in time. The amunt by which assets exceed liabilities is called net wrth r wner's equity; als called a net wrth statement r financial statement. Cmparative balance sheet - A listing f the current balance sheet with thse f previus years s trends can be identified. Statement f changes in financial psitin - A listing f the amunt by which varius items n the balance sheet change frm ne time perid t the next. Bk Value - The value f an asset as it appears n the balance sheet, equal t cst minus accumulated depreciatin.

2 Brrwing Base Certificates - A cllateral base, agreed t by the Brrwer and Lender, which is used t limit the amunt f funds the Lender wuld advance the Brrwer. The Brrwing base specifies the maximum amunt that can be brrwed in terms f cllateral type, eligibility and advance rates. Capital - As used in capital assets, capital investments, capital imprvements; t describe mney invested in anticipatin f a return ver a lng perid f time. Human capital - Human assets cnsisting f items such as skilled wrkers. Physical capital - Cnsists f financial assets and real assets. Cash flw - Cash mney flwing in and ut f the business. Cash flw is nt the same as prfitability. Cash flw budget - A summary f all cash incme and expenditures fr a given perid f time, nrmally ne year. It shws when additinal funds will need t be brrwed, and when funds will be available fr repayment f debt. Wrking capital - The amunt f capital r current assets available fr use in perating the business. Cmmnly calculated as the amunt by which current assets exceed current liabilities. Chattel - Tangible persnal prperty (e.g., tractrs, grain, livestck, vehicles). Clsing - Prcess by which all fees and dcuments required by a lender prir t disbursing lan prceeds are executed and filed. Usually used in reference t the cmpletin f a real estate transactin that transfers rights f wnership in exchange fr mnetary cnsideratins. Clsing csts - The csts incurred by brrwers and sellers in cmpleting a lan transactin. Included are riginatin fees, inspectins, title insurance, appraisals, attrney and realtr fees, and ther csts f clsing a lan. Cllateral - Prperty pledged t assure repayment f debt. Cmmitment - A frmal agreement between a lender and brrwer t lend up t a specified amunt f mney at a specified future date subject t specific perfrmance criteria and repayment terms. Cmmitment fee - The fee assciated with the establishment f a lan cmmitment. The fee is usually expressed as a percentage f the lan cmmitment. C-signer - An individual in additin t the brrwer wh signs a nte and thus assumes respnsibility and liability fr repayment.

3 Cvenant - A legal prmise in a nte, lan agreement, security agreement r mrtgage t d r nt t d specific acts; r a prmise that certain cnditins d r d nt exist. A breach f a cvenant can lead t the injured party pursuing legal remedies and can be a basis fr freclsure. Credit - Mney brrwed with the understanding that it will be repaid. Creditwrthiness - The ability, willingness and financial capability f a brrwer t repay debt. Credit verificatin - The prcess invlved in cnfirming the creditwrthiness f a brrwer. Line f credit - Cmmitment by a lender t prvide up t a set amunt f funds during a specific perid f time. Funds are drawn against this cmmitment as they are needed. Als called a budget lan. Nn-revlving line f credit - A line-f-credit in which the maximum amunt f a lan is the ttal f lan disbursements. Repayments d nt make lan funds available again as in a revlving line-f-credit. Revlving line f credit - A lan in which a maximum lan balance is set. As a brrwer repays during the term f the lan, he/she can again brrw up t the lan limit withut applying fr a new lan. Unsecured creditr - A creditr that des nt have a lien n any particular prperty is unsecured. Current rati - A liquidity rati calculated as current assets divided by current liabilities. Debt - A financial bligatin wed t anther. Debt Cverage Rati - A measure f repayment capacity. It is calculated by dividing Ttal Funds Available (net f Living Expenses, Incme Taxes and nrmal Depreciatin/Replacement Expense) by the sum f Shrt Term Interest, Principal and Interest n Term Debt, and Capital Lease Payments. Ttal Funds Available (TFA) is defined as the sum f net farm incme, net nn farm incme, depreciatin, interest n lng-term debt, interest n shrt-term debt and capital lease payments. Debt-t-asset rati - A slvency rati calculated as ttal liabilities divided by ttal assets. Debtr - The persn wh either wes payment r ther perfrmance n an bligatin such as a cntract r nte. Default - The failure f a brrwer t meet the financial bligatins f a lan r a breach f any f the ther terms r cvenants f a lan.

4 Delinquency - The status f principal and/r interest payments n a lan that are verdue. Dwn payment - The equity amunt invested in an asset purchase. The dwn payment plus the amunt brrwed generally equals the ttal value f the asset purchased. Encumbrance - A claim r interest that limits the right f prperty. Examples include liens, mrtgages, leases, dwer rights f easements. Escrw - The prcess f an agent prviding safe keeping f cash, securities and dcuments and handling the paperwrk and transfer f funds fr the brrwer and seller. Equity - The amunt f the wner's capital invested in a business. The amunt by which assets exceed liabilities. Fr example, equity in a farm is the value f the farm less the amunt wed against it; als called wner's equity, r net wrth. Fees - A fixed charge r payment fr services assciated with a lan transactin. Filing - Giving public disclsure f a lender's security interest r assignment in cllateral. In many cases this includes ntice t certain gvernment agencies. Financial statement - A written reprt f the financial cnditin f a firm. Financial statements include balance sheet, incme statement, statement f changes in net wrth and statement f cash flw. Financing statement - A statement filed by a lender with a public fficial. The statement reprts the security interest r lien n the brrwer's assets. Freclsure - The legal prcess by which a lien against prperty is enfrced thrugh the taking and selling f the prperty. Incme statement - A summary f incme and expenses ver a given time perid. In additin t cash incme and expenses, it takes int accunt nn-cash expenses like depreciatin. Accrual Incme Statement - An incme statement that, in additin t including cash incmes and expenses, takes int accunt all changes in the value f inventries and capital t arrive at net farm incme Net farm incme - The prfit r lss frm the year's peratin. It is calculated thrugh the use f an incme statement. It cnsiders nt nly cash incme and expenses, but als depreciatin, inventry changes and the value f prducts cnsumed in the farm hme. Net cash farm incme - The prfit r lss fr the year using nly cash incme and cash expenses.

5 Statement f retained earnings - Financial statement that recnciles the balance in retained earnings accunt at the beginning f the incme statement perid t the balance at the end f the perid. Interest - A charge paid fr the use f smene else's mney. It includes three things: 1) A return t the lender fr the use f the mney. 2) A return t accunt fr the devaluatin f the mney ver the repayment perid due t inflatin. 3) A return t the lender as cmpensatin fr the pssibility that the lan may nt be repaid (risk). Basis Pints - Usually used in describing interest rate mvements r interest csts. One basis pint is 1/100 f 1%. Fr example, 50 basis pints is 0.5%. Effective interest rate - The effective interest rate includes the nminal r interest rate plus the additinal interest due t cmpunding. Prime rate - A natinally quted rate believed t represent the interest rate charged by U.S. mney-center banks t their mst creditwrthy crprate brrwers. Prime rate may als refer t an individual lender's interest rate charged t its mst creditwrthy brrwers, althugh the term base rate is mre cmmnly used. Interest calculatins - There are a number f methds fr calculating interest charges. Several f the mre cmmnly used methds are discussed belw. Annual Percentage Rate (APR) - A disclsure f all csts (lan fee, discunt rates, etc.) invlved with a lan t shw the actual percentage interest paid n an annual basis. Remaining balance - Interest is calculated nly n the remaining r unpaid balance f the lan. As a result, interest payments decline as the unpaid lan balance declines. The effective rate is the same as the stated rate. Simple interest - Used n lans with a single payment. Interest is calculated n the amunt f the lan during the time perid fr which the mney is brrwed. The effective rate is the same as the stated rate. Variable interest - The interest rate may be adjusted up r dwn during the term f the lan depending n the interest rates in majr mney markets r the prime interest rate. Leverage - The use f brrwed capital t enlarge the size f the business t a size greater than wuld be pssible using nly equity capital. Because the return t brrwed capital is fixed (interest rate), the rate f return (prfit r lss) t equity capital is magnified. It is used when the returns frm using additinal capital is expected t be greater than the cst f brrwing it. Lien - A claim by a creditr n prperty r assets f a debtr in which the prperty may be held as security r sld in satisfactin (full r partial) f a debt. Liens may arise thrugh brrwing transactins where the lender is granted a lien n the brrwer's prperty. Other examples f liens include tax liens against real estate with delinquent taxes, a mechanic's lien against

6 prperty n which wrk has been perfrmed, and a landlrd's lien against crps grwn by a tenant. Liabilities - Financial bligatins f a business. There are several categries f liabilities frequently used in agricultural finance. The liability will nrmally be secured by assets in similar categries. Fr example, current liabilities are nrmally secured by current assets. Cntingent liability - Financial bligatins that becme due nly under specific circumstances. An example is incme taxes n capital gains if farmland is sld. Current liability - A financial bligatin which will becme due and payable within a ne year perid. It includes the current principal payment and accrued interest n intermediate and lng term debts. Current assets may be used as cllateral fr current liabilities. Intermediate liability - Liabilities whse repayment schedule is spread ver a tw t ten year perid. Intermediate assets may be used as cllateral fr current liabilities. T prvide adequate cllateral in later years, the life f the asset shuld be lnger than the term f the lan. Lng-term liability - Liabilities whse repayment schedule is spread ver a 10 t 40 year perid. Lng-term r real estate lans (mrtgages) are usually secured by lng-term assets. T prvide adequate cllateral in later years, the life f the asset shuld be lnger than the term f the lan. Liquidatin - The sale f assets t generate cash needed t meet financial bligatins, transactins r investment pprtunities. Liquidity - The ability f a business t generate cash t meet its financial bligatins as they becme due. Liquid Asset - Cash r an asset that can easily be cnverted t cash. Lan agreement - Typically refers t a written agreement between a lender and brrwer stipulating terms and cnditins assciated with a financing transactin and in additin t thse included t accmpanying nte, security agreement and ther lan dcuments. The agreement may indicate the bligatins f each party, reprting requirements, pssible sanctins fr lack f brrwer perfrmance, and any restrictins placed n a brrwer. Lan cmmitment - A frmal agreement t lend up t a specified dllar amunt during a specified perid. Lan cmmittee - A cmmittee f lan fficers, executive persnnel and/r directrs f a financial institutin wh establish lending plicies and/r apprve lan requests that exceed the lending authrity f individual lan fficers.

7 Lan-t-asset value - The rati f lan balance t the value f assets pledged as cllateral t secure a lan. Lan types - Lans can be classified in varius ways based n their length, their requirements fr security, and their repayment schedules. Adjustable Rate Lan - An adjustable rate lan has prvisins t change the interest rate at pre-specified pints in time based n changes in a market index, a lender's cst f funds r ther factrs as determined by the lender. Balln lan - Lans with peridic payments during the term f the lan, with the remaining balance due at maturity. Payments may be interest nly r interest plus sme prtin f the principal. The balln payment is the final payment f a balln lan and cntains the unpaid balance, which may amunt t mst f the riginal lan amunt. Bridge lan - A temprary, single-payment lan used by creditrs t abridge the time perid between the retirement f ne lan and the issuance f anther. An example is a lan used fr the dwn payment n a new real estate purchase. Cnstructin lan - A lan where mney is advanced as cnstructin takes place and mney is needed. Fixed rate lan - A lan that bears the same interest rate until lan maturity. Intermediate term lan - A lan t be repaid (r amrtized) ver a perid f 18 mnths t 10 years, with 3 t 5 years being mst cmmn. Intermediate-term lans typically are used t finance machinery, equipment, autmbiles, trucks, breeding livestck, imprvements, and ther durable, yet depreciable, assets. Lng-term lan - A lan t be repaid (r amrtized) ver a perid f time exceeding 10 years, with 20- t 30-year lans being cmmn when financing real estate. Operating lan - A shrt-term lan (i.e., less than ne year) t finance crp prductin, livestck prductin, inventries, accunts receivable and ther perating r shrt-term liquidity needs f a business. Secured lan - A lan n which sme asset is pledged as cllateral t ensure payment f the lan. Shrt term lan - A lan scheduled t be repaid in less than a year. Signature lan - A lan fr which n cllateral is pledged. Single payment lan - A lan in which the entire amunt wed is due in ne payment at maturity. Take-ut-lan - A permanent lan arrangement t replace a cnstructin lan. Nrmally a lng-term lan is implemented when the cnstructin f a facility is cmpleted. The facility may serve as cllateral fr the new lan. Term lan - A lan that requires nly interest payments until the last day f its life, at which time the full amunt brrwed is due. Unsecured lan - A lan fr which there is n cllateral required. The lan is backed up nly by the prmise f the brrwer t repay.

8 Market Value - The value f an asset as it appears n the balance sheet, equal t its value at current market prices. Master nte - A nte (prmise t repay) ften used in cmbinatin with line-f-credit financing t cver present and future brrwing needs thrugh peridic disbursements and repayments f lan funds. Maturity - Amunt f time until the lan is fully due and payable. Fr example, a 5-year intermediate-term lan has a maturity f 5 years. Mrtgage - A legal instrument that cnveys a security interest in real estate prperty t the mrtgagee (i.e., a lender) as an assurance that a lan secured by the real estate mrtgage will be repaid. Blanket mrtgage - A lien n mre than ne parcel f real estate. First mrtgage - A real estate mrtgage that has pririty ver all ther mrtgages n a specified piece f real estate. Secnd mrtgage - The use f tw lenders in a real estate mrtgage in which ne lender hlds a first mrtgage n the real estate and anther lender hlds a secnd mrtgage. The first mrtgage hlder has first claim n the brrwer's mrtgaged prperty and assets in the event f lan default and freclsure r bankruptcy. Net wrth - The financial claim by wners n the ttal assets f a business, calculated as ttal assets minus ttal liabilities equals net wrth; als called equity capital and wnership equity. Nte - A written dcument in which a brrwer prmises t repay a lan t a lender at a stipulated interest rate within a specified time perid r upn demand; als called a prmissry nte. Prepayment penalty - An amunt charged by a lender n a lan paid prir t its maturity. Pr frma statements - Financial statements that are prjected fr future time perids. Balance sheets, cash flw statements, and incme statements are ften prjected t determine the expected future financial status f a business. Principal - The dllar amunt f a lan utstanding at a pint in time, r the prtin f a payment that represents a reductin in lan balance. Principal is distinguished frm interest due n a lan r the interest prtin f a lan payment. Refinancing - A change in an existing lan designed t extend and/r restructure the repayment bligatin r t achieve mre favrable lan terms by transferring the financing arrangement t anther lender r lan type.

9 Renewal - A frm f extending an unpaid lan in which the brrwer's remaining unpaid lan balance is carried ver (renewed) int a new lan at the beginning f the next financing perid. Repayment ability - The anticipated ability f a brrwer t generate sufficient cash t repay a lan plus interest accrding t the terms established in the lan cntract. Repayment capacity - The ability f a business t repay brrwed mney. Right f rescissin - A prvisin f the Truth in Lending Act which gives a brrwer the right t rescind a brrwing transactin (i.e., change his r her mind) within three business days n any transactin in which the principal residence is used t secure the lan. Security agreement - A legal instrument signed by a debtr granting a security interest t a lender in specified persnal prperty pledged as cllateral t secure a lan. Blanket security agreement - A security interest in favr f the lender cvering all chattels. Stck requirement - A methd f capitalizing lending institutins such as the cperative Farm Credit System. The brrwer is required t purchase stck in the lending assciatin t btain a lan. The stck requirement generally is specified as a percentage f the lan r as a dllar amunt. The stck requirement may be a lw as 2% f the value f the lan r a maximum f $1,000. The purchase f stck is a financial investment in the issuing institutin which is typically paid back at lan maturity, but the lender is nt bligated t d s. Trading Rati - A measure f liquidity defined as trading assets divided by trading liabilities. Trading Assets include accunts receivable, inventry held fr sale, cash investment in grwing crps, livestck inventries and cash t be used in the peratin. Trading Liabilities include any debt related t the trading assets, i.e., shrt term ntes, verdrafts, accunts payable and livestck lans (perating lans as well as breeding herd lans). Truth in lending - The federal Truth in Lending Act is intended t assure a meaningful disclsure f credit terms t brrwers, especially n cnsumer lans. Lenders are required t infrm brrwers precisely and explicitly f the ttal amunt f the finance charge which they must pay and the annual percentage interest rate t the nearest.01%. Excluded transactins include lans fr cmmercial r business purpses, including agricultural lans; lans t partnerships, crpratin, cperatives and rganizatin; and lans greater than $25,000 except fr wnerccupied, residential real estate mrtgages where cmpliance is required regardless f the amunt.