Farm Finance Tips to Help You Get Approved
Getting approved for a loan as a farmer is complicated. The industry is cyclical and highly seasonal, which can make lenders leery of agricultural loans. Loan approval will likely require complex documentation, collateral and credit history checks, and comprehensive financial statements – even for small loans. And still, you might not be approved.
However, you can better navigate the complex process by considering the following finance tips. These tips will give you an edge before you start the application process so you can approach a lender with confidence.
Start with a Business Plan
Before you seek financing, start with a business plan. You need to prove to yourself in detail that your operation, expansion, or purchase is viable and sustainable. Your plan should include your farm's financial goals, operating costs, and expected revenue. It should outline your farm ground, equipment, livestock (if applicable), and other facilities. If you are a beginning farmer, consider your qualifications and experiences. Include those in your plan. If you create a well-developed business plan, you can show a lender you are serious and show that you’ve got a good chance of success.
Maintain a Strong Credit Score
Like other lenders, an agricultural lender will check your credit score. A credit score gives them insight into your character. A good credit score helps a lender know you are a safe bet – you make your payments on time and make good credit decisions in your personal life. Of course, a poor credit score does not mean you won’t get approved, but it will require an explanation and likely a longer approval process. To increase your chances, maintain a good credit score or work to improve your existing score.
Consider your Capacity
Capacity is your ability to repay the loan according to the proposed terms. Lenders will closely consider this when they make a decision. If your capacity aligns with their benchmarks, your chance for approval will increase. They will look at your farm's monthly or annual cash flow (or both) to ensure you have the capacity (after expenses) to make the payment when it comes due. They do this by analyzing your historical income statements and cash flow budgets.
Consider your Capital
Like capacity, lenders look closely at what they call capital. Capital is how much equity you have in your farm. You might think of it as how much “skin you have in the game.” You can determine owner’s equity by dividing your net worth (assets minus liabilities) by your assets. 50% owner equity is a good place, though some lenders will want more, and some will be okay with less. Your capital position helps a lender feel confident that you have enough equity in your assets to secure a loan or to weather unexpected circumstances.
Consider your Collateral
And finally, consider the collateral you have to offer a lender for security. The collateral position you need will vary based on the type of loan and the lender’s discretion. Typically, the collateral for a loan will be the item that the loan will go to purchase. If you buy a tractor with the loan, that tractor will be the collateral. If you are looking for an operating loan, the collateral would be all the inputs to operate your farm and the crops you harvest, including the receivable on those crops once sold. A strong collateral position will help the lender feel confident in your loan.