Direct Balance Sheet Lending – How The Face Of Agriculture Finance Is Changing
Finance is the lifeblood of every business on the planet. Agriculture is nothing different. Do you know that agriculture finance currently empowers hundreds of thousands of farmers as we speak? According to an independent study, farmers all across the world will be able to feed more than 9 billion people by the end of 2050.
Industries are expanding across multiple spheres and this is why industrial real estate financing along with multifamily financing options have become hugely popular. This post however focuses on agriculture financing and how direct balance sheet lending benefits farmers in the long haul.
The global population is on the rise and this is why there is a very huge and drastic upsurge in the demand for agricultural produce. The changing dietary preferences of our present and future generations are also going to impact agriculture as a whole. According to the current estimates, demand for food is going to increase by more than 71% by the end of the year 2050. It will call for at least $80 billion as annual investments to meet this increase in demand.
At the present moment, the financial sector and the many institutions in this industry are constantly helping the agriculture sector with regular but disproportionate credit. This is being compounded by the growth of agriculture finance markets which has been for the most part quite haphazard.Several factors seem to be working to constrain our farmers such as the following:
• Inadequate and ineffective financing policies
• Rise in transaction costs
• Inability to reach remote and rural populations
• Dearth of adequate financial instruments to help manage risks
• High degree of fragmentation leading to low level of demand for agriculture finance
• Lack of expertise among financial institutions with regards to industrial as well as real estate and agriculture financing
We are witnessing a drastic commercialization of the agriculture sector as we speak. Therefore, we need larger agriculture investments and relevant infrastructure to provide long-term funding to farmers as well as companies involved in the farming sector both directly and indirectly. Enter direct balance sheet lending!
What Is Balance Sheet Lending And How Does It Benefit The Farmer?
Direct balance sheet lending is also referred to as portfolio lending. This means that the original lender of your loan is going to keep the debt on their own financial statements. This arrangement is made for the entire life of the loan. The lender is going to take on all the risk associated with this amount of money.
Understanding The Working Of Balance Sheet Lending
Direct balance sheet lenders will first arrange the money in advance which can be sourced from investment banks, family offices and also financial markets.By the time the funds are ready to be dispersed to a borrower, they have gone through a lot of hands. This means that by the time the borrower is able to get their hands on the funds, they have already grown a little expensive.The surety however that you will get the much-needed capital infusion for your business is something that makes this form of loan even more lucrative for the borrower.
Final Thoughts
The biggest benefit of balance sheet lending is easy and effective communication between the lender and the borrower. You cannot have that with traditional lending and conventional financial institutions in the mix. There are no collection companies that are going to buy your debt and sell it to other companies. This means that it is not going to be difficult for the borrower to catch up on their loans. These loans are also easier for the borrowers to manage. This is because the debt is going to be retained by the original lender who is not only your original collection company but also your partner in capital as well as risk management.
