Many prospective and existingfish farmers indicate that theyhave experienced difficulties inobtaining financing for aquacul-ture businesses. In many cases,lenders are not familiar withaquaculture practices and marketpotential. In other instances,lenders are concerned with theuncertainty and risk associatedwith aquaculture ventures. How-ever, even if a lender understandsaquaculture and its potential, aninadequately prepared businessloan proposal will result in a rejec-tion by the lender.There are two major componentsof a business loan proposal: themarketing plan and the financialanalysis. Taken together, a well-conceived marketing plan and acarefully documented financialanalysis will result in more favor-able consideration by a lender.
The marketing plan
The marketing plan is often themost overlooked component of abusiness proposal. Many growersfocus on the technical aspects of fish production and do not spendtime considering market opportu-nities. Yet the most successfulaquaculture businesses often arethose that are market-oriented,have diverse markets, and arecommitted to their customers.Aquaculture operations proposedfor areas without a history of aquaculture may work withlenders who are unlikely to haveknowledge of aquaculture prac-tices and potential. In this situa-tion, it is useful to present infor-mation on the size of the industry,current trends, and overall growthpotential.The marketing plan should bedeveloped before the financialanalysis. Decisions regardingspecies, harvest size, or volumeshould be based on a comprehen-sive and specific market analysisfor that particular business.Small-scale producers especiallyshould carefully analyze marketopportunities before beginning toproduce fish.Apotential producer should beginby talking with all local retailoperations that handle fish. Evenif the grower intends to sell strict-ly to a processing plant, it isimportant to understand the prod-uct qualities and characteristicsexpected by the retail operatorsand end consumers. Visits shouldbe made to grocery stores andrestaurants that sell fish. Thepotential grower should pay closeattention to price, product form(fillets, steaks, whole-dressed, in-the-round, fresh, frozen, etc.), pro-duct quality requirements, speciesavailability, quantities sold, etc.Conversations with the restaurantmanager or seafood buyer for thestore can shed light on sources of supply, preference for processors,and quality issues. All potentialand established fish producersshould understand the retail envi-ronment of their product.Large-scale growers clearly needto identify a high-volume marketoutlet such as a processing plant.It is essential that a potentialgrower invest the time to meetwith the processing plant buyersbefore construction of the facili-ties. Key considerations and infor-mation from the plant includesuch factors as:1.Historical prices paid for fishfrom this plant as comparedto other plants.2.Dockage rates (poundage orpercentage deducted from thetotal delivery amount) fortrash fish, out-of-size fish, tur-tles, or other reasons.
VIPR
March 1997SRAC Publication No. 381
Developing Business Proposals forAquaculture Loans
Carole R. Engle and Nathan M. Stone*
*Aquaculture/Fisheries Center, Universityof Arkansas at Pine Bluff, Arkansas
1
23.Requirements related to pur-chasing stock in the companyand the potential for billback.(Billback has been used bycooperatives to break evenfinancially by billing any loss-es for the year back to thestockholders in the proportionof fish supplied to the plant.)4.Transportation charges.5.Payment frequency to growersand typical length of timebetween the time of deliveryof fish and receipt of payment.6.Seasonality issues.7.Delivery volume require-ments.8.Requirements and limits tofish size. For example, someplants will not pay for fishthat are smaller or larger thana specified size range whileother plants may dock a per-centage off the entire load if the proportion of out-of-sizefish is higher than the plant’sstandard.9.Quality standards, proce-dures, and requirementsincluding flavor scores, sizing,and meat quality.10. Delivery quotas and schedul-ing patterns for deliveringfish.11. Whether or not contracts arerequired.12. State bonding requirementsand whether or not the plantis in compliance.Any documentation from theplants on these issues or a letterstating that they will purchasefish from the individual willstrengthen the business loan pro-posal.Small-scale producers will needto identify alternative marketingoutlets to maintain a profitableoperation (see SRAC PublicationNo. 350,
Small-Scale Marketing of Aquaculture Products,
for addition-al information). Several alterna-tives include:
1.
Live sales with custom pro-cessing
. In areas with populationsexhibiting regular fish consump-tion, sales of live fish can be ameans of achieving higher prices.The capability to process fishaccording to preferences of thecustomer may attract a broaderclientele. (State and local healthcodes, permits, and HazardAnalysis Critical Control Points(HACCP) must be consideredbefore developing this type of marketing plan.)
2.
Fee-fishing operations (paylakes)
. Fee-fishing operationsessentially sell a recreationalopportunity to their customers,but if located within 30 to 50 milesof a major population center, fee-fishing may offer a viable marketoutlet for farm-raised fish.
3.
Sales to local grocery storesand restaurants
. This requires on-site processing unless restaurantpersonnel clean the fish. Typicallyonly managers of very exclusiveseafood restaurants will purchasewhole fish to be cleaned by theirpersonnel. State and local healthcodes, permits, and HazardAnalysis Critical Control Points(HACCP) must be consideredbefore developing this type of marketing plan.
4.
Sales to or through livehaulers
. These firms or individu-als truck live fish to pay lakes orlive sale markets. For catfish, alarger (2 to 3 pound) fish typicallyis required.For all the above, careful estimatesof volumes, size preferences, costsassociated with the sales, andstate and local regulations mustbe evaluated carefully.
The financial analysis
There are many excellent bookson the preparation of a businessloan proposal, on farm manage-ment, and on the financial analy-sis of agricultural businesses. It isbeyond the scope of a fact sheet topresent detailed definitions of theterms and concepts used in devel-opment of the financial statementsdiscussed below. Alist of refer-ence materials is included at theend for additional backgroundand detail.The business proposal must beginwith a description of the sitewhere the aquaculture operationis to be established. Suitability of the site in terms of soil character-istics, environmental conditions,and water supply must be pre-sented. The proximity of the pro-posed farm to processing facilities,feed mills, aquaculture supplyfirms, equipment repair services,disease and diagnostics laborato-ries, and the Extension office fortechnical assistance should bemade clear. This demonstrates tothe lender both the distance thefarm will be from these servicesand that the individual knowswhere to find these services.Background information on spe-cific permits that will be required,procedures, and probable timeframe to obtain required permitsshould be presented.
Description of Production System.
The business proposal shouldinclude a thorough discussion of the proposed production system.Stocking rates, fingerling sources,anticipated feed rates, and aera-tion strategy need to be presentedclearly and consistently. Forexample, the feed rate should beappropriate for the stocking rate;low stocking rates do not requireintensive aeration.Harvesting methods should beincluded. Capital investmentrequirements differ for farmerswho plan to harvest their ownponds and for those hiring customharvesters. If the business plancalls for custom harvesting, then alisting of those serving the areawhere the farm will be locatedshould be included. Informationon fees charged, volume require-ments, and scheduling constraintsshould be presented.
3Possible production problemssuch as off-flavor should be men-tioned. This demonstrates to thelender awareness of the problemand also warns the lender of potential cash flow or debt repay-ment problems.
Estimated Cost and Returns.
Atable of annual cost and returnsshould be estimated for the pro-posed production system. As inTable 1, returns are estimated bymultiplying the total expectedharvest weight times the expectedprice per pound.Under variable costs, all produc-tion costs are itemized. Theseinclude feed, fingerlings, chemi-cals, fuel, labor, etc. Ask yourcounty agent for CooperativeExtension Service budgets to useas a guide.Fixed costs include depreciation,taxes, and general overhead.Published budgets should be usedas a guide to estimate these costs.Fixed costs are important in deter-mining if the business will beviable over a long period of time.Finally, variable and fixed costsare added together and subtractedfrom the returns to calculate netreturns. Net returns is the esti-mate of annual profit for the farm.
Estimate of Required Financing.
The business proposal must clear-ly summarize financing require-ments for the fish farm. Requiredfinancing should be divided intothe following loan categories:operating, equipment, and realestate.The amount of capital for an oper-ating loan is based on the amountof variable cost required. Equip-ment loans cover the purchase of any new or additional equipmentnecessary, while a real estate loancovers the cost of constructingponds, buildings, or other rela-tively permanent structures. Re-payment schedules should bespecified to demonstrate how rev-enues will cover debt payments.The owner may wish to schedulepayments in such a way as toeither defer payment or only payinterest the first year; constructionof ponds or other facilities andweather delays may cause rev-enues to be delayed the first year.The borrower will need to presenta sound plan to demonstrate howinterest will be paid during theconstruction phase and throughthe first year’s production season.In many cases, it may be 18 to 24months before income is realized.For operating lines of credit, a lienon the fish crop and a first mort-gage collateral position will berequired by most lenders as aminimum standard.
Current Appraisal of Farm.
Alender will require a currentappraisal that reflects the valuebefore and after ponds and facili-ties are constructed. This will beused to calculate a loan toappraisal value ratio. Mostlenders will want a loan to valueratio of 50 percent to 125 percent,depending upon the borrower’sfinancial strength. Some lendersmay require a Farm ServiceAgency (FSA:formerly FmHA) orother type of guarantee for thosewith loan to appraisal valuesabove 50 percent.
Pro Forma Balance Sheet.
Thebalance sheet lists what the assetsand liabilities (debt) would be forthe entire business including thenew aquaculture operation. Fromthe balance sheet, net worth canbe calculated as well as the fol-lowing financial ratios: equity/ asset ratio (owner equity),debt/asset ratio, debt/equityratio, and current ratio.Table 2 illustrates the organizationof a balance sheet. The lenderuses the balance sheet to indicatesolvency and liquidity or thefinancial strength and position of the business. Many lenders preferan owner equity of 60 to 65 per-cent for aquaculture loans. Anylower level would require verystrong earnings and some form of guarantee (e.g., FSA). An ownerequity of 50 percent is probablythe lowest that would be consid-ered.
Table 1. Example of annual costs and returns for 160-acre catfishfarm (seven 20-acre ponds)
a
.CategoryUnitUnit PriceQuantityTotal1. RETURNS
Catfishlb$0.75700,000$525,000
2. VARIABLE COSTS
Fingerlingseach0.06700,00042,000Feedton273.00770210,210Fueltotal18,698118,698Chemicalstotal5001500Labortotal36,600136,600Harvesting and Haulingtotal28,000128,000Othertotal24,000124,000Interest on OperatingCapitaldol.0.11270,00629,701
3. FIXED COSTS
Depreciationdol.52,561Interestdol.40,740Taxes and Insurancetotal2,000
4. TOTALCOSTS (2+3)
dol.$485,010
5. NET RETURNS (1-4)
dol.$39,990
aSOURCE: Engle, C.R. and H.S. Killian. 1997. Cost of Producing Catfish onCommercial Farms in Levee Ponds in Arkansas. Arkansas CooperativeExtension Service, Little Rock, Arkansas.
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