Answer to Question #307436 in Accounting for Joel

Question

You own a farm and grow seasonal products such as pumpkins, squash, and pears. Most of your business revenues are earned during the months of October to December. The rest of your year supports the growing process, where revenues are minimal, and expenses are high. In order to cover the expenses from January to September, you consider borrowing a short-term note from a bank for $300,000. Based on this scenario, please complete the following:

• Research the lending practices of a local bank.
• Determine the interest rate charged for a $300,000 loan.
• Determine the collateral the bank requires to secure the loan?
• Determine your overall payback amount if you were to repay the loan in less than one year.
• Choose either a payback with periodic payments or all at the end of the loan term, and compare the
• outcomes.
• After conducting your research, would you consider borrowing the money?
• What positive and negative outcomes accompany borrowing the money?

Answer 1

A business entity can borrow loans based on the estimated income flows that it will create,the loan can be treated as good debt if it increases the net profit for the business entity.The bank increases the interest rates or the cost of acquiring capital because of risk associated with the repayment of loan.A=P(1+rt)thus the loan amount is $300000 thus the interest rate is 11%.The bank will check the account savings, mortgages, debits cards,the farm will use the title deed such that if it fails to pay the bank will seize it based on the two parties agreement.The benefit of payback will help analys the reliability of the project without much complexity though it ignores the time value of money thus fails to depict the detailed picture ignoring other factors too.Loan will help to keep the farm operations ongoing for the period of 9 months without much struggles, though if the the interest are too high the asset that's is the farm is at risk if the it cannot make the repayments.