An applicant for a loan prepares a financial statement, describing the stock he has to offer as collateral and the facilities for taking care of it, the amount of real estate he owns or has leased, and his outstanding debts. The loan company verifies the borrower's statement by confidential inquiries through banks and other parties; it searches the county records to verify the recorded debts of the borrower; it has an inspector make a personal inspection of the facilities for caring for the stock, the amount of feed on hand, the general reputation of the applicant as a cattleman, and the number of his cattle, at the same time determining whether they correspond with the description given in the application. The loan is generally made or rejected on the inspector's report. The business reputation and honesty of the applicant and the condition of the livestock and money markets, are other important considerations. If the application is approved, a note is drawn, and, as collateral, a chattel mortgage on the stock and its increase, on the feed on hand, and sometimes on the facilities for handling the stock, such as horses and machinery.
The amount loaned varies from 50 to 80 per cent of the full value of the stock; a margin of 20 to 25 per cent is considered amply sufficient, for the natural increase in weight and number of the animals reduces the hazard of cattle loans. The size of the loan varies from a few hundred to a million dollars. Small loans are more advantageously made through local agencies, since local agencies are familiar with the applicant and his financial standing and do not have the expense of inspection. Moreover, small loans are generally too costly for cattle-loan companies.
The loans are for short terms, generally running for six months. This period of time is adopted because of the rediscount feature of the cattle-loan business, and because that length of time will ordinarily be long enough for the "feeding out" of a bunch of cattle. In the case of loans on stockers and breeders, it is understood that the loans will be renewed if desired. The loans are commonly classified as feeder loans, stocker loans (on cows, on young stock, and "summer loans"), and dairy loans. It is assumed, of course, that the proceeds of the loan will be devoted to the improvement of the herd.
The interest rates depend upon the rediscount rate and the degree of competition among borrowers and among lenders. Only marked fluctuations of the rediscount rate affect the local rates charged. The rates will also be graduated according to the desirability of the applicant. The cost of inspection has an important bearing upon the loan rate, for it must be assessed back upon the borrower, and therefore borrowers living in remote and isolated places have to pay higher interest rates.