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 farmcredit.com 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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