Today, I’m going to take you through the steps of how poultry farm loans work and…
…why you don’t need one!
I know.
The challenge of lifting your enterprise off the ground with little available capital might be overwhelming.
But before applying the blinkers…
Hear us out.
If you want to learn:
- how poultry farming loans work,
- how a government grant works,
- the best way of funding your project
Read this guide.
What exactly is a poultry farm loan?
A poultry farm loan is…
“…a promissory transaction of money given (capital sum) by a lender [donor/giver] to a borrower [recipient],
…for the purpose of buying capital business assets to run a poultry farm,
…the borrower being bound by law to an agreement to restore the money in full to the lender within an agreed timescale and according to a prescribed schedule of instalments
…the agreement therefore having a clear commencement and a termination.
However:
…the money given comes at a real cost to the borrower,
…this cost is added on top of the repayment of the capital sum,
…the cost of borrowing is calculated as a percentage rate of return, known as ‘interest’
…the end result is the capital sum being used by the borrower for the duration of the agreement
…during which the borrower works to repay the capital sum back to the lender in full:
- on schedule, &
- with additional interest at the agree rate, paid on top.
Once both capital sum and interest monies are paid in full to the lender, the agreement is terminated and there are no further obligations or binding duties remaining for either party to fulfil.
Often as a measure of counteracting, “
A definition by The Big Book Project
The most common reasons for start-up farmers seeking after loan financing is to acquire:
- land
- buildings
- equipment
- stock
Do you find yourself being in a situation similar to our ‘would-be’ poultry farming entrepreneur below?
Meet Arjun…
Arjun has designs on beginning a layer poultry farm in his home town, Bharuch in Gujarat, India.
He has a well paying I.T. contractor day job, but is set on making the transition from 9-5 into full time farming.
He owns a plot of land which measures just over 1 bigha, which until now has been left unused, but remains in tidy enough condition.
Arjun intends to cultivate a mixed agricultural production on his farmland including a variety of vegetable crops and of course his layer farm.
He wants to house 5,000 layer birds – taking approximately 10,000 sq. ft of his available land.
With this capacity of egg farm he hopes to produce enough to serve the needs of 30+ popular hospitality outlets in the city, Ahmedabad.
In order to start-up, he requires the following:
- poultry housing,
- feeders,
- drinkers,
- ventilation and heating equipment,
- a delivery vehicle,
- trays and
- 1st year operating expenses (to replace his wages)
Whilst he has savings, he prefers not to use them to start his venture – but opts for applying to borrow bank funds via a poultry farming loan.
Why not use the savings?
Without the loan…
Arjun is not confident that his personal savings will be sufficient to acquire all the capital assets which he has shortlisted to run the farm with…
As well as maintaining his household income.
Now to take a look at some poultry farm loans and learn how they work…
Arjun begins his search for a poultry farming loan by filing through advertised loan products online, seeking for the most favourable of terms and conditions to kick start his layer poultry farm.
Quite swiftly, Arjun found a selection of seemingly viable poultry farm loan opportunities in Gujarat.
He now reviews their application procedures & qualification criteria to see if they he is eligible to apply.
Whilst examining the small print of said bank loan opportunities (prior to any commitments), he also examines governmental grant subsidies which are available for ventures like his.
Before he puts his mind to arriving at a decision – he first plots out his projected poultry farming costs and profits using a project report.
He elects to download our 10,000 layer project report for an example financial plan to illustrate his plan in detail.
Having studied the details of the example project report, Arjun developed greater understanding of how a layer farm would be commercially calibrated…
But came away unsure about the real benefit vs. cost of starting his layer farm on borrowed funds rather than his own money.
Having searched online for poultry farming business consultants, Arjun found The Big Book Project team and submitted a query for help in understanding…
The true cost of taking out a poultry farm loan.
Here follows our professional advice on bank loans for poultry farms…
How bank loans and mortgages work for starting up a poultry farm…
According to our definition of loan above, there are various components of a poultry farm loan, principally:
- capital lump sum
- repayment instalments
- repayment schedule
- interest
In an ideal scenario (post agreement – that is) every point on the list above would be accounted for and fulfilled.
e.g. the capital sum lent would be returned, by planned instalments, according to schedule with the cost of interest at the desired rate paid on top…
However, there is an important factor unaccounted for which ought to be addressed:
Risk.
What about risk?
The underlying reality involved with every loan arrangement is the ‘what-if’ scenario of:
“…borrower default.”
This simply means:
“What damage will be done if the borrower is unable to keep to the agreement and fulfil the terms?”
The real potential for this adverse occurrence of:
Failure to keep the terms of borrowing…
Gives credence to the lender laying on a condition of surety or security against the loan given.
Quite simply,
There is a clause added to the term and conditions of the loan which states:
If the borrower is unable to upkeep the terms agreed…
the borrower will forfeit, or lose, their possession of a worthy asset.
In the consumer finance market, where individuals borrow, for example:
Mortgages (long term loans) for the purpose of buying and living in a house:
They pledge the possession of the house they live in as surety to the lender, should they default on the repayment terms.
So, in real terms, if the borrower defaults on the agreement, the house they live in and call home…
(…which throughout the term of borrowing actually belonged to the lender – making the borrower a tenant renting from the lender for 40 years, for example…)
…will be seized by force, by the lender.
Secured Agricultural Loan
In agricultural business, the underlying assets are land and buildings.
As a start-up poultry farmer, let’s say, whether you have land in your possession or not…
If you seek the money of a bank, for example, to purchase infrastructural items like:
- land
- buildings (construction)
- equipment
- machinery
- stock etc.
The bank will expect in return, as written in the terms of the loan arrangement, that in the event of a default…
You, the borrower, will simply be forced, backed and enforced by law, to hand over possession of the land and buildings used for the farm.
Repossession.
By etymological or root definition:
- Re-: Latin re- “again, back, anew, against,”
- Possession: possidere “to have and hold, hold in one’s control, be master of, own,”
So, what you thought was your asset, is simply taken back by the one who legally possesses and has the power to legally enforce it’s return.
There is no recompense for your time to date, or your labour, nor consideration for your personal state following repossession…
Just a straight forward reclamation.
What’s the margin of failure?
It needn’t be much.
And it needn’t be reasonable.
In other words, the lender carries a guarantee that should the deal not go according to plan…
That they can liquidise the underlying/pledged assets, which by way of the legal written loan agreement, are (upon signing the paperwork) already transferred into pending ownership of the lender…
The lender from the time of signing is already guaranteed to gain, either way.
But…
On the contrary…
What guarantee does the borrower have…
Should the business they plan not afford them the ability to keep up with the loan terms of repayment?
Answer:
None at all.
Should the business not provide the scheduled profits according to plan…
The borrower carries full liability for upholding the terms of the loan agreement, regardless.
What if business goes against you? What’s your contingency?
As with life firstly and therefore business thereafter, in general:
Things don’t always go to plan.
And there are a multitude of things which can go against the theoretical assumptions of your poultry business plan:
- MACRO ECONOMIC RISK…
- taxation changes
- foreign exchange fluctuations
- MICRO ECONOMIC RISK…
- price of chicken falls
- cost miscalculations
- staff shortages
- bird mortality/sickness
…what if any of these entirely plausible happenings occur and work against your planned profits…
Causing you default on your loan terms…
Where is your guarantee or surety should these things happen?
Loan Risk: A 2-Way Street
Risk is not unilateral…
It is works both ways.
Why bind yourself to an inequitable agreement which puts you at great disadvantage from the start of your venture?…
(And unnecessarily so.)
Why take a bank loan to start your poultry farm?
Is it an option worth taking?
Or should it even be an option?
What does the poultry farm loan application process look like?
Take the details declared on the application form of the IDBI Bank as an example:
- Limits and balances of any other credit arrangements held by the borrower
- Formal, or informal borrowing arrangements
- Land holdings of the borrower
- Income statements for any other current businesses of the borrower
- Net worth (assets and liabilities) of the borrower
- If you have a guarantor, their contact details and net worth
In order to have the credited funds released to you by the bank, the bank will require the information above.
But why so much?
What relevance does all that information have in the scheme of arranging a bank loan?
What is the underlying rationale of the questions asked during the procedure of a poultry farm loan application?
Point no. 1 ‘other credit or borrowing arrangements’ –
- This gives the bank lending the poultry farm loan a view of:
- …what other lending institutions might also have competing claim against assets held by the borrow, in case of default.
Point no.2 ‘formal or informal borrowing arrangement’ –
- This gives the bank lending the poultry farm loan the ability to:
- …estimate your true cash flow position and therefore feasibility of paying the obligatory sums whilst also keeping up with other current debt arrangements.
Point no.3 ‘land holdings held by the borrower’ –
- This gives the lending bank an idea of:
- …all land assets up for grabs should the borrower default their payments and fall into collapse/decay.
Point no.4 ‘business income statements‘ –
- This gives the new bank visibility of:
- …the current business earnings of the borrower, to see what contingency income is already in the hand of the borrower and available to pay the obligation in question, should the poultry farm underachieve, or fail
Point no.5 ‘net worth’ –
- This gives the bank lending the poultry farm loan:
- …sight of valuable possessions held by the borrower which could be liquidised (i.e. sold in exchange of money) upon the event that the proposed poultry farm doesn’t fulfil its planned potential.
Point no. 6 ‘guarantor‘ –
- This gives the bank the promise of:
- …another person who in the event of the borrower defaulting on their arrangement will assume the place of the borrower in terms of the legal obligations of the agreement.
- i.e. …if after all the defaulting borrower’s assets and possessions are liquidised to provide monetary recompense to the lender, and there still be outstanding liability to claim by the lender, the lender will approach the guarantor having power to legally charge them for fulfilling the arrangement
- …another person who in the event of the borrower defaulting on their arrangement will assume the place of the borrower in terms of the legal obligations of the agreement.
Ask yourself the question…
- Is this level of disclosure to all your personal financial information…
- (pertaining not only to your proposed poultry farm enterprise)
- …worth handing over for such a short/medium term use of some lender’s money?
Also, if the lending party requires such an invasive screening of your personal & financial condition…
Plus, requiring the personal collateral of an able substitute and acting guarantor, should you as the borrower default…
Are you as comprehensive in your poultry farming business planning – to support a confident projection of future profits and earnings?
If the bank is this diligent in evaluating your financial position prior to lending…
Have you done at least as much due diligence in your own project planning, in protecting your own future entrepreneurial benefit?
If the answer is, no:
Then you should consider revising your poultry business plans to have a far more evidenced foundation.
How hard is to qualify for a poultry farm loan? Eligibility, criteria and questions…
Summarising from various lender’s (inc. State Bank of Pakistan) published eligibility requirements for poultry farm loans…
Poultry Farm Loan Eligibility
The following is a brief list of eligibility criteria:
- sufficient knowledge, expertise and training in poultry farming
- …this ensures that handling of the poultry farm is in competent hands – being able to fulfil the operational duties to an optimal level
- repaying capacity
- …the likelihood that the borrower is able to pay the lender back with interest over the agreed loan duration, not only from the proposed poultry farm profits, but also from existing income
- managerial skills
- …how feasible the financial projections and estimations on paper really are in the hands of the borrower
- margin money (borrower’s contribution)
- …the borrower contributes as much as 25% of the total loan amount out of their own pocket towards the loan amount applied for
Ask yourself…
If you already have the:
- …qualifications and skills to successfully run the poultry farm successfully
- …income to incrementally repay the capital sum on a loan, plus interest over the medium term
- …managerial skills to achieve the financial projections contained in your project report
- …at least 25% of the money you require for a loan in hand anyway
…this begs the question…
Why would you then be looking to legally bind yourself to a loan arrangement and run the real risk of losing your land?
Or worse, why would you risk your home and future earnings?
Why not start smaller and within your means? And without the risk of losing assets if things don’t go exactly to plan.
What does a bank look for in a model report for a poultry farm loan?
A model report for a poultry farm loan tells a bank or lender:
Your precise approach and adopted business modelling for achieving the expected profits.
The key features of a model report for a poultry farm loan are as follows:
- Type, capacity and rearing model
- …exactly what type of poultry farm you have in mind & how many birds you expect to be rearing at any given time, plus the system of organising them for optimal results
- Poultry buildings
- …how you expect to arrange the birds into housing according to your prescribed rearing model
- Farm equipment
- …the necessary feeder, drinker and other relevant equipment needed for running your poultry farm
- Batches & rearing intervals
- …your system for replenishing your poultry flock with optimally productive birds to keep your business output consistent
- Operational costs
- …your estimation of direct costs of sale and overheads for your poultry farm business
- Start-up capital requirements
- …how much total start-up funds would be required to acquire the necessary items to begin your proposed farm operation at the planned size and scope
- Production
- …how much output you expect your poultry farm to produce at the given intervals of production
- Income statement
- …how much profit (surplus income) your proposed poultry farm is expected to make annual over the loan duration
- NPV (net present value)
- …how much the money loaned today would be worth at a future date as discounted against the proposed interest gained of an equivalent investment opportunity
- BCR (benefit cost ratio)
- …how much the respective costs of the proposed poultry farm are covered or can be absorbed by the corresponding benefits or profits of the business
The conclusion of the report being BCR (benefit cost ratio) is the indicator by which any prospective lender will evaluate the attractiveness of your proposed poultry farm business…
‘Attractiveness’, in other words meaning…
The ability of your proposed business (on paper, at least) to provide the profits by which to suffice:
- ongoing costs of running
- earnings for the owners
- return for investors
- *repayments for lenders*
…and not necessarily in that order.
Where a business on paper offers the potential to achieve all of these benefits and more – banks and commercial lenders will be very willing to lend (all other eligibility factors being in place, of course).
Where the proposed benefits are insufficient to cover such costs, banks will reject the proposal.
Having produced such a report for the purpose of obtaining a secured poultry farm loan…
Why would you hand over the potential future benefits of your poultry farm to paying back a lender (?)…
Who during the course of running the farm will simply seize the land, or buildings should you be unable to keep to the terms of your loan agreement (thus derailing your earning potential to dig yourself out should things improve)?
Think carefully.
How do government subsidies/grants for poultry farm loans work?
Governments worldwide offer subsidy schemes and grants to ‘would-be’ poultry farmers who are interested to apply for commercial funding.
But what kind of government subsidy (financial help) is available for a poultry farm loan?
Everybody knows a government handles public funding, as opposed to private funding.
And that governments sometimes provide both loans and grants to producers of various kinds via finance schemes, making available capital sums for investment to individuals and businesses who meet the criteria for receiving.
Loans and grants/subsidies principally differ on the premise of repayment.
Loans are to be repaid.
Whereas grants and subsidies are not.
The definition of subsidy:
- Latin subsidium “a help, aid, assistance.”
Why and how do governments use subsidies for assisting enterprises like poultry farms?
Where the cost of commodities are relatively high and therefore prohibitive for many to access…
Governments will often allocate protected (ring-fenced) budgets from public funding, for the purpose of reducing the cost of the said commodity on the open market.
However, the mechanism for how this works in practice may not necessarily be as most lay-consumers would expect.
Take the example of the Nabard – Poultry Venture Capital Fund Scheme.
The method of delivery for scheme is known as a back-ended subsidy.
What is a back ended government subsidised poultry farm loan?
“A back-end subsidy involves direct payment of a subsidy at a later date to the borrower, who pays the market rate up front.“
- Govt may pay interest subsidy directly to borrowers – The Hindu Business line
This simply means that in order to encourage prospective borrowers to obtain poultry farm loans from commercial providers like, State Bank of India (SBI)…
The Indian government (in this case) promises to reduce the cost of the commercially available loan repayments by 25% for the borrower’s sake, by way of granting the borrower a lump sum capital payment…
…equivalent to 25% of the total loan value…
…the catch…
But this back ended payment is only paid to the borrower after the bank loan has been repaid in full by the borrower according to the repayment schedule.
Only after the commercial loan has been repaid, will the government then release the subsidy funding to the borrower directly.
This in effect indeed does the job of decreasing the cost of the loan taken by the borrower (assistance), which were taken upfront…
Albeit, by way of a back-ended capital subsidy…
i.e. at the end.
Example poultry farm loan scenario…
Indiafilings.com the online tax filing service for India gives great insight as to what the stipulations of:
- margin money (entrepreneurs contribution)
- back ended capital subsidy
- bank loan
…would look like when explained side-by-side…
The following assistance is provided under the Poultry Venture Capital Fund Scheme:
- Entrepreneurs contribution (margin) – for loans upto Rs.1 lakh, banks may not insist on margin as per RBI guidelines. For loans above Rs.1 lakh: 10% (minimum).
- Example:
- If a poultry business is to be setup with a total investment of Rs.10 lakhs, then the Entrepreneurs contribution or investment must be at least Rs. 1 lakh.
- Back ended capital subsidy – 25% of outlay (33.33 % for SC/ST farmers and NE states including Sikkim)
- Explanation:
- In a back ended capital subsidy scheme, the Entrepreneur would have to avail and bank loan and pay the installments due.
- The final loan installments equal to 25% of the total investment amount would be adjusted as back ended capital subsidy.
- Effective bank loan (excluding eligible subsidy as above) – balance portion, minimum 40% of outlay
- Explanation:
- Bank loan must be obtained for a minimum of 40% of the total project cost to avail subsidy.
- Therefore, if the total project is Rs.10 lakhs, then the bank loan component must be at least Rs.4 lakhs.
A very helpful and illustrative way of showing how the expectations of a borrower in a poultry farming bank loan agreement interact with government subsidised payments.
Good job, Indiafilings.com!
Back to you…
Now, back to evaluating the benefit of a government subsidised poultry farm loan:
Whilst a subsidised loan to start your layer or broiler farm may indeed seem a preferable method of getting your enterprise off the ground…
Again, why not ask yourself the question…
If you are able to qualify for receiving such financial assistance from both a commercial bank as well as the government…
And will agree to wait between 5-7 years of repaying your poultry farm loan in full…
Whilst bearing the risk of losing your underlying capital assets of land and buildings…
And only at the length, after the course of 5-7 years of repayment in full, receive the benefit of the subsidy…
Why don’t you…
Start your poultry farm at a more modest level within your means…
Growing the business organically from your own personal finances & hard work…
Keeping all the profitable benefits produced by the enterprise…
And not running the risk of losing capital assets should things not go according to plan?
Our conclusion on poultry farm loans…
I know…
The sober talk of living within one’s means might be a far cry away from what you were thinking before reading this guide…
But, you must admit…
It is worth asking the question:-
What’s better?…
Growing a 1,000 bird farm steadily and organically for 5-7 years to 35,000 on your own steam without any binding agreements or risk of total calamity…
Or,
Getting the keys to a 20,000 bird poultry farm leveraged to the eyeballs and with only the smallest margin for error available – and the pending seizure of asset repossession hanging over your head whilst you slog away everyday at a venture – the promised profits of which are already levied against by lenders…
What’s really in it for you?
If you want our advice…
- stay debt free
- work hard
- grow slow
- giving value being better than receiving
Your thoughts…
Feel free to comment below.
Thank you