March 9, 2018

Coffee Producers, Should You Take Out a Business Loan?

Getting a loan can help you to expand your farm size, invest in processing equipment, purchase new varieties, and more. When done as part of a well-thought-out business strategy, it can be a springboard for future success. But any loan comes with risk. Allow us to take you through the case for and against applying for one, as well as how to prepare for the application process.

Lee este artículo en español Productores de Café: ¿Deberían Pedir Un Préstamo?

Coffee farm

View from the cooperative Coopeave in Venda Nova do Imigrante, Espírito Santo, Brazil. Credit: Ivan Petrich

Why You Might Get a Loan

There are many reasons why you might choose to get a loan. Long-term loans might be used for purchasing land and coffee trees. Short-term, smaller loans might be taken out for fertiliser or processing equipment and infrastructure.

Loans can provide funding so you can expand your business or vertically integrate, so that you can process – and potentially even export or roast – your crops. When crisis strikes, they can be used to rebuild farms or tackle coffee leaf rust. They can also be used to invest in more efficient, cost-effect processes or technology so as to see greater profits later on.

But the most important thing to consider is whether that loan will be profitable.

Learn more! Read Farm, Mill, & Roastery: How Producers Can Vertically Integrate

Coffee flowers

Coffee flowers and green cherries at a farm in Honduras. Credit: Gisselle Guerra

Why Maybe You Shouldn’t Get a Loan

If a loan isn’t profitable, then your outgoings will increase due to the loan repayments and interest rates, but your income won’t. This will create a financial burden that some farms may not be able to recuperate from.

Additionally, and especially for long-term loans, remember that coffee prices may fall, costs may increase, currencies may strengthen or devalue, leaf rust might strike, and more. As a producer, you know how unpredictable the coffee industry is. 

Failure to repay a loan may result in equity, such as farm equipment or even land, being possessed by the bank. While a loan can support a coffee farm in becoming profitable, it can also be risky.

You might also like A Coffee Producer’s Guide to Choosing a Processing Method

Before getting a loan, make sure to get technical and financial advice on the profitability of your goals and how to achieve the best results with that money. Ensure that the profit margin will be significantly high enough that, even if costs increase or production falls, you can still make repayments.

Natural processed coffee

Natural processed coffee being dried in coffee beds on a farm in Honduras. Credit: Amec Velásquez

How to Get a Loan

Your first thought may be to get a business loan from a bank. However, there are other options available. In addition to government initiatives and institutions, your cooperative – if you belong to one – might offer loans. This is particularly useful for smaller loans, which banks may not offer.

When applying for a loan, consider the loan term, interest rate, and repayment start date. Some lenders will require immediate repayments; others will delay them. Additionally, look into how much support the lender provides; some will have technical consultants who specialise in coffee production.

It is always a good idea, before getting a loan, to speak to a financial advisor.

view from a coffee farm

View from a Colombian coffee farm. Credit: Angie Molina

The Application Process

The lender will expect you to come with a large amount of paperwork demonstrating your income, expenditure, and taxes. A business plan that shows how the loan will lead to greater profits may be useful. Some banks also require a business to have been running for a certain period of time.

In addition to inspecting this information, representatives from the bank could visit your the farm to evaluate risk. If the bank decides that the risk is high, they might ask for equity, such as machinery or land.

If you’re offered a loan, you don’t have to accept it. Since many of the terms and conditions, such as equity and interest rates, will be part of the offer, carefully consider these – and ideally seek financial advice – before signing the contract.

Coffee drying

Coffee drying on raised beds at Cuatro M, El Salvador.

Loans present significant risk as well as a business 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, better quality coffee, and expanded operations.

Found this useful? Check out A Coffee Producer’s Guide to Choosing a Processing Method

Perfect Daily Grind advises that all loans present a risk and that readers should 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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