Monday, October 14, 2013

Getting a Loan Doesn’t Have to be Difficult!

This is from Penn State University’s blog written by Farm Credit's Amanda Ramer.  The information she writes is true for Missouri as well.

Many of the farmers I have spoken to have expressed frustration at the difficulty of getting a loan.  They have cited many reasons such as:

·       No banks will give me a loan
·       My bank won’t finance properties over 5 or 10 acres
·       My bank requires a 30% down payment to buy bare land and the loan is only for 10 years
·       The interest rate to buy a tractor is almost as high as a credit card
·       My bank requires monthly payments but the majority of my income is in only 2 months of the year

This does not need to be the case!  I will describe how to find a lender to work with and what information lenders consider when reviewing your application.
How to Find a Lender to Work With
The first step in obtaining a loan for an agricultural business is to find a lender that specializes in farm financing.  Examples include the Farm Credit System, the Farm Service Agency, and a few local banks.  Lenders that specialize in farm financing understand the unique features of a farm business such as seasonal cash flows, weather and commodity risk, and collateral that may include farm assets such as a tractor, greenhouse, or livestock.

To find an agricultural lender, I would recommend contacting your local Extension office to ask if there are any lenders they would recommend.  You can also simply go to and click on locations to find a Farm Credit branch near you.

After identifying one or two lenders, review their qualifications and ask them a few questions to see if they will be able to fit your needs.  Some of the questions to ask:

·       Do you provide loans to fit all needs of my farming business including equipment, operating funds, buildings, and real estate?
·       How long have you been in agricultural lending?
·       Do you have a loan minimum or a lending limit?
·       Are there pre-payment penalties?
·       What happens if I have a crop failure?

What Information Lenders Consider When Reviewing Your Application
When reviewing a loan application, lenders evaluate the overall risk of the loan.  All loans involve some level of risk.  A lender needs to determine how much risk they are willing to take to give a loan.  The business plan, tax returns, financial projections, or other documentation you provide helps the lender evaluate the risk.  To do the risk analysis, lenders refer to the “Five C’s of Credit” which include:

1.     Capacity refers to how profitable the business is.  If it is a new business and the lender asks you to provide a projection of the first year of income and expenses, what is the projected profit?  Is there room in the budget to include debt payments? Is there room in the budget to save for unexpected expenses such as broken equipment or a crop loss?

2.     Capital refers to the amount of equity you have.  For example, if you are starting a new business, a lender likes to see you invest your own cash as well to have “skin in the game.”  The more an individual invests into her business, the less likely she is to walk away from the business.

3.     Character refers to the impression you make to the lender.  Does your credit report show that you have made other debt payments on time? A history of late payments reflects a higher probability of late payments on the new loan.  What are your qualifications? Do you understand how to market your product (if necessary)? Do you know how to manage risk? If the lender asks for a business plan, you then have the opportunity to tell your story and explain how you will run the business.

4.     Collateral refers to the asset that provides a secondary source of repayment.  If all else fails, the collateral can be sold to pay off the loan.  The overall risk of the loan plays a role of determining what type of collateral may be needed.  A lender that specializes in farm financing often works with “non-traditional” collateral such as equipment, livestock, greenhouses, etc.  If a business does not have sufficient assets to pledge as collateral, agricultural lenders are experienced working with other entities such as the Farm Service Agency who provide loan guarantees; this helps to reduce the risk of the loan and allows the lender to provide the loan.

5.     Conditions refer to the amount of the loan, the interest rate, fees, if the lender is requiring you to insure the collateral, etc.

The bottom line is to find a lender that specializes in farm financing.  You do not need to be an expert on how to structure a loan, what type of collateral to use, or how to structure the payments.  An agricultural lender should be able to ask questions about your business and specific situation and then propose a solution to fit your needs.

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