SELF-LIQUIDATING LOANS AN OPTIMAL LOAN PROGRAM: A MATURITY STRUCTURE OF DEBT THAT MATCHES THE LENGTH OF THE PAYOFF PERIODS FOR THE ASSETS BEING FINANCED. A REPAYMENT PATTERN OVER TIME THAT MATCHES THE ASSET'S EARNINGS PATTERN

A SELF-LIQUIDATION LOAN IS MADE FOR A PURPOSE THAT GENERATES SUFFICIENT INCOME TO REPAY THE LOAN WITHIN THE MATURITY PERIOD. THE MATURITY OF THE LOAN AND THE SCHEDULE OF REPAYMENT MUST BE SUCH THAT THE PAYMENTS CAN BE MET FROM THE CASH GENERATED BY THE INVESTMENT.

FINANCING CURRENT ASSETS OPERATING LOANS - TYPICAL OPERATING LOANS ARE FOR THE PURCHASE OF OPERATING INPUTS SUCH AS SEED, FERTILIZER, CHEMICALS, LABOR, ETC.

BEING PRODUCTION INPUTS, THESE ASSETS ARE USED UP OR CONVERTED IN THE PRODUCTION PROCESS. GENERALLY THE LENDER MUST RELY ON A SECURITY INTEREST IN THE GROWING CROPS AND OTHER FIXED ASSETS TO PROVIDE THE NECESSARY COLLATERAL FOR OPERATING LOANS.

IN ORDER FOR AN OPERATING LOAN TO BE SELF- LIQUIDATING, LOAN REPAYMENTS SHOULD BE SCHEDULED TO COME FROM INCOME GENERATED FROM PRODUCT SALES. THE SOURCE OF REPAYMENT FOR AN OPERATING LOAN IS FROM THE CASH GENERATED FROM SALES.

FINANCING DEPRECIABLE ASSETS DEPRECIABLE ASSETS INVOLVE THE PURCHASE OF MACHINERY, EQUIPMENT, AND BREEDING LIVESTOCK. THE ASSETS ARE USED IN THE BUSINESS OVER SEVERAL YEARS AND THEIR CAPITAL COSTS ARE CHARGED AGAINST THE BUSINESS AS DEPRECIATION OVER THE ECONOMIC LIFE OF THE ASSET.

DEPRECIATION COMES FROM WEAR AND TEAR AND OBSOLESCENCE. MOST DEPRECIABLE ASSETS PROVIDE EFFECTIVE COLLATERAL AND CONTRIBUTE TO THE FIRM'S NET WORTH. PROPER FINANCING OF A DEPRECIABLE ASSET SHOULD SYNCHRONIZE THE LOAN MATURITY AND REPAYMENT SCHEDULE TO THE CASH GENERATED BY THE ASSET.

IN PRACTICE IT IS DIFFICULT TO IDENTIFY THE TIMING AND MAGNITUDE OF THE CONTRIBUTIONS TO PROFITS OF DEPRECIABLE ASSETS. HOWEVER, WHEN DEPRECIATION IS CHARGED AGAINST REVENUES IN THE INCOME STATEMENT, CASH IS ESSENTIALLY BEING SET-ASIDE FOR CAPITAL REPLACEMENT AND THUS PROVIDES A SOURCE OF LOAN REPAYMENT.

LOAN MATURATES SHORTER THAN THE DEPRECIATION SCHEDULE REQUIRE A DIVERSION OF FUNDS FROM WORKING CAPITAL AND THEREFORE REDUCE LIQUIDITY.

FINANCING FIXED ASSETS THE PRIMARY FIXED ASSET IN AGRICULTURE IS LAND, ALTHOUGH DEPRECIABLE ASSETS SUCH AS BUILDINGS, FENCES, AND OTHER REAL ESTATE IMPROVEMENTS ARE CONSIDERED AS FIXED ASSETS. LOAN MATURATES FOR FARM REAL ESTATE LOANS ARE TYPICALLY LONG-TERM LOANS (20 TO 40 YEARS)

THE CASH RENT EQUIVALENT (PROFITS AFTER TAXES AND WITHDRAWALS) FOR MOST FARMS HAS NOT BEEN SUFFICIENT TO MAKE REAL ESTATE LOANS SELF-LIQUIDATING.

THE PRIMARY SOURCE OF REPAYMENT IS FROM RETAINED EARNINGS THE PRIMARY SOURCE OF REPAYMENT IS FROM RETAINED EARNINGS. THEREFORE, WHEN RETAINED EARNINGS ARE NOT SUFFICIENT FAMILY LIVING WITHDRAWALS ARE REDUCED, WORKING CAPITAL IS REDUCED, AND/OR INTERMEDIATE OR FIXED ASSETS ARE SOLD.

SOURCES OF LOAN REPAYMENT OPERATING LOANS - CASH FROM THE SALE OF THE PRODUCT PRODUCED. INTERMEDIATE-TERM LOANS - FROM CASH SET-ASIDE FOR DEPRECIATION. LONG-TERM REAL ESTATE LOANS - FROM RETAINED EARNINGS (PROFITS LESS INCOME TAXES AND FAMILY LIVING WITHDRAWALS)

FAILURE TO MEET ANY ONE OF THESE CONDITIONS INDICATES THAT: DEBT HAS NOT BEEN APPROPRIATELY ALLOCATED TOTAL DEBT IS TOO GREAT