Getting a loan can help you to expand your farm size, invest in processing equipment, purchase new varietals, and more. While we would always recommend being cautious when taking on debt, when done as part of a well-thought-out business strategy it can be a springboard for future success.
At Micro Festival El Salvador, we spoke to Victor Hernandez of Banco Hipotecario. His bank currently gives loans to 200 producers, cooperatives, mills, exporters, and coffee marketers in El Salvador, totalling US $91 million in value. He told us how they decide to give loans, as well as his recommendations for getting the best use out of those additional finances.
A producer examines coffee cherries. Credit: Maria del Pilar Ruiz via Wikimedia
Why Get a Loan?
Victor lists two main reasons that producers and other coffee professionals might choose to get a loan: “For long-term loans, the most common reason is purchasing land… For small-term loans, it’s for the harvest. For fertiliser, equipment, and so on.”
Yet every applicant is different. Victor tells us of one female producer who was able to become vertically integrated with this support.
“[She] used to only sell coffee cherries, but then she applied for a loan with us. This allowed her to create the whole infrastructure for producing coffee – but she didn’t know to use it. So we provided technical assistance as well. After three years, she could control everything from seed to export, so she saw a real change. Now she and her daughter visit roasters all around the world, apply for certification, are environmentally friendly, and innovate with new varietals to meet market demands.”
Other applicants need help to respond to crises or decreasing profits. “One cooperative used to produce 400,000 quintales (18.4 million kg), but now it’s producing 4,000 (184,000 kg). It’s a huge reduction in production. We assisted them with becoming cost-effective with the small amount they’re currently producing. In this way, the cooperative could reinvest and focus on [the most profitable] areas.”
New equipment, expanding the business in size, vertical integration, restructuring… there are many reasons why a coffee professional might wish to apply for a loan. But one of the things Victor emphasises is the value of getting technical and financial advice on how to achieve the best results with that money.
Producers can use loans to add micro mills to their farms. Credit: Cecilia Quan via Evodia Coffee
More Than One Way to Get a Loan
There are multiple ways to get a loan in El Salvador. Banco Hipotecario specialises in large loans. “The minimum loan size we give is $25,000, and the maximum $4 million. But the average is $100,000.”
The bank doesn’t offer smaller loans, Victor says, because in El Salvador these are available through government institutions. However, Banco Hipotecario also provide loans to cooperatives that, in turn, provide loans to their members. This means that, if they belong to a cooperative offering this service, smaller farmers have a choice about who to turn to.
Cooperatives can apply for loans. Credit: Anny Ruth Pimentel
A short-term loan will typically be 18 months long, Victor tells us, while a long-term one could be up to 15 years. The short-term loan will have an interest rate of 6%, while a long-term 7%. Repayment may start immediately or it could be delayed, depending on the reasons for applying and the business forecast.
I ask if these are typical loan conditions in El Salvador; he says that there is some variation. They recommend smaller businesses apply through the government institutions, since these can offer better rates.
Victor also adds that the bank has additional funding available for businesses with sustainable certifications, such as Rainforest Alliance, through its international partnerships. One such relationship is with eco.business Fund in Germany.
Short-term loans can be used for the harvest. Credit: Ryan Moser
The Application Process
Victor explains that a loan may be granted within less than a week, but it can take as long as a couple of months. An applicant who is prepared will receive their answer much quicker.
Applicants should come with all their paperwork, showing income, expenditure, and taxes. Banco Hipotecario require a business to have been running for at least two years. I ask about a business plan, and he nods. “If they have a business plan, that’s good.”
He explains that, at this initial stage, Banco Hipotecario wants to see that the applicant views their farm as a company. Then they want to know that the business will be profitable in the long term.
The bank will provide a score for the applicant and their business plan. Victor tells us that they are currently “mapping” all the farms in the area to analyse both potential risk and room for social impact. They will also visit the farm to evaluate it.
If the score is low, Victor tells me that they might ask for equity, such as machinery or land. I ask if it’s possible to get a loan without this; Victor tells me yes. “If they have a good production forecast and they know the market and how it’s behaving.”
Loans present a risk – both to applicants and banks. This is why Banco Hipotecario provides as much technical and financial advice as possible. “We make sure that someone from the bank, who is specialised in coffee production, is involved at every stage,” Victor says.
They can also be an opportunity. We would never advise taking a loan without receiving financial advice from a qualified individual or body. But as part of a long-term business strategy, they can result in greater profits, smoother processes, better quality coffee, expanded operations, and more.
Interview conducted by T. Newton and A. K. Molina Ospina, and translated from Spanish into English by A. K. Molina Ospina.
Banco Hipotecario was a sponsor of PDG Micro Festival El Salvador. This interview was conducted in accordance with our editorial policies, and Banco Hipotecario has had no greater influence on the final copy than any of our other interviewees. Furthermore, we advise that all loans present a risk and that readers seek professional advice before applying for one. Perfect Daily Grind is not responsible for the results of failing to make loan repayments.
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