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Finance insight with Mekupi Kambatuku – Things to consider before taking out a farming loan

Home Agriculture Finance insight with Mekupi Kambatuku – Things to consider before taking out a farming loan
Finance insight with Mekupi Kambatuku – Things to consider before taking out a farming loan

I have received a lot of queries about loans from agripreneurs/farmers and SMEs, from where to go and the best loan options, to how loans are structured and finally to how to know when it is the right time to take a loan.

Before taking any loan or even the consideration thereof, one has to analyse the factors that are compelling you to go for the loan option and think of the ways by which this can be avoided. Ask yourself whether you really need that loan. 

The idea is not to be afraid of loans but to do proper due diligence on the reasons and your payment ability thereafter. The rule of thumb is that whatever you are taking the loan for should be an income-creation investment, which will double the loan value and ensure repayment capacity.

There has to be a clear plan on how the loan will be utilised and for how long. Below are things to consider before taking a loan:

 

What is the purpose of the loan?

What is the total cost of the loan, have an understanding of things such as interest rate and additional charges

How long would it take you to pay this loan back (loan payback period)

What additional benefits come with the loan such as a grace period?

What are the economic returns/gain on the loan, as defined by the purpose of the loan?

What is the loan repayment plan?

Identify the timing of disbursement and loan processing period for the envisioned purpose

How are you going to ensure that you pay the monthly/annual instalments, what internal controls have you set to ensure financial discipline?

Make sure that you do a comparison of all offers for similar products from different financial providers

 

It is advisable to also consult a trusted financial adviser to help you make a well-informed decision before taking a loan, and committing your resources to the liability that comes with it.

Most Importantly, make sure that the economic returns on a loan you intend to take outweigh the total loan cost. It is imperative that you only borrow for income-generating and productive investments. More on the loan considerations in next week’s column, be on the lookout.