Money & Markets:Working with your Lender

You don’t have to borrow money to start your business, but borrowing money can get you to your dream of a farm much faster than waiting to save up the necessary cash. That means you need to develop a good relationship with an agricultural lender. A relationship with your lender can be an important asset to your farm business regardless of its size.

When you apply for a loan the lender can become an advocate for you to the loan committee. After the loan is approved, the lender has a vested interest in your success and becomes a member of your management team

So how do you establish a good relationship with your lender? Open and honest communication is a first good step. And the Boy Scout creed of “be prepared” is the second step. If you are envisioning an enterprise that is alternative agriculture enterprise you may have to be even more prepared. You should develop a business plan that outlines your marketing strategy and have resources to support the numbers you use. You may need to be prepared to educate your lender on the potential of your alternative agriculture business.

As you prepare your business plan you should consider the four C’s of credit: collateral, cash flow, credit score, and character.

Collateral: Collateral is the term used to describe assets that secure a loan. It is the security that lenders seek in order to take the risk on loaning you money. Lenders will request your balance sheet to outline what collateral you have. A balance sheet, also called a net worth statement, is more than just a list of assets. You must also include your debts. Lenders calculate financial ratios from the information on your balance sheet and these ratios provide a picture of your equity position. One is your working capital, which are your current assets (cash, savings, checking, products for sale within the year – which could be market animals, harvested crops, etc.) minus your current debts. Current debts are accounts that should be paid in the next year and also the principal and interest on long term loans that must be paid within the year. Working capital, also known as the current ratio, measures how much in liquid assets a company has available to build its business. In general, farms that have more working capital have more potential to be successful since they can expand and improve their operations. Lenders may want to see a current ratio of 2:1, which means, you should have twice as many liquid assets as you do current debt load. The other ratio that lenders will consider is your debt-to-asset ratio, which is your total debt divided by your total assets. Many lenders like to see a debt-to-asset ratio of 40% or less. Knowing these are two ratios your lender will be reviewing you can impress your lender by asking what kind of ratios they like to see for current ratios and debtto- asset ratios.

Cash Flow: The income statement is the financial statement that provides cash flow information to you and your lender. In simple terms, the cash flow is an estimate of your income and expenses you will have during your enterprise season. For example, for a cropping enterprise the expenses will be fast and furious in the spring, with little or no income coming from the enterprise. The income will come in the fall after harvest. The lender will want to know that you have thought through the production cycle of your enterprise. This will tell you and your lender when your income will be lean and you may need that operating loan. It will also indicate to the lender when you’ll be able to pay off the operating loan and the payment for long term debts will be due.

Preparing the income statement really will help you prepare for your enterprise, whether you are borrowing money or not.

Credit history: Yes, lenders will review your credit history. They will want to know if you’ve made your payments on time and if you’ve abused credits or credit cards in the past. A free credit history is available to each individual per year. Take the time to review yours before you go to your lender.

Character: In the past, character would have been at the top of the list of the four Cs. Now the financial numbers and ratios are weighted more than if you are from the area or not. Part of this switch is due to the fact that there are fewer small town banks, but even small town banks are businesses and treat small business and farm loans as such. Realizing that this is a business transaction and business relationship, and attitude can still be a factor in how smoothly your relationship with your lender (and loan application) proceeds.

Putting your time and energy into research, preparation and attitude can pave a lasting and productive relationship with your lender and help you achieve your goal of a successful farming enterprise. Working on your four Cs and developing your financial statements are two steps to securing a loan for your enterprise. These steps are in addition to completing business and marketing plans.

Author: Joy Kirkpatrick,

Outreach Specialist Center for Dairy Profitability

Originally Published: The Weekend Farmer, Fall 2006