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)
.CategoryUnitUnit PriceQuantityTotal1. RETURNS
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)
5. NET RETURNS (1-4)
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.