The decision to lend by any bank ultimately depends on a client’s ability to repay the loan. This in turn is also dependent on the client’s cash flow. Insufficient cash flows equal non-repayment. No matter what the size or scale of the farmer’s estate or reputation, a bank will its knowledge and agricultural expertise to estimate cash flow of a farmer. The banks decide whether the farmer will be able to repay the loan. Sector specific knowledge will also be used to shape the terms of the loan and establish how best to monitor the client throughout the season so as to be able to quickly spot any issues. Lending to farmers and assessing cash flows presents a number of challenges less prominent in other sectors.

Cash flow with agricultural production is not regular. It is somewhat lumpy. When producing a crop the farmer will often need to invest on seeds, fertilizers, pesticides, labor, maintenance and harvesting upfront. Yet farmers will only receive an income from their crop once they have harvested and marketed it. Depending on the crop, the farmer may only receive income once or twice a year. This lumpiness needs to be taken to account when scheduling loan disbursements and repayments. Banks will typically monitor a loan performance based on the receipts of regular payments taking an early action when payments are delayed. When loans are repaid with just one payment at the end of the season however banks may want a regular visit to the farm throughout the period of the loan. This allows them to check in with their borrower and insure that crop production is on-track. Along with the regularity of payments, farmers yield and prices in agricultural production will also vary from season to season.

Often based on factors beyond their control such as the weather. A loan officer ensure they factor in any potential fluctuation and use appropriate sensitivity when forecasting cash flow for an agricultural client. The loan officer needs also to appreciate that small holder incomes and expenses are not solely reliant on agriculture production. But it needs to be considered in relation to the entire households’ finances.  Cash flow forecasting must assess the household’s position in its entirety with repayment capacity based on whether they is sufficient household cash after all expenses have been considered. Essentially a bank should only lend to farmers if they can accurately assess the household’s complete financial situation and projected cash flow throughout the loan period. Otherwise there’s a risk of being caught out come payment time.