Ag experts come together to advise young, beginning producers on major hurdles — credit and capital
The 5 Cs of Credit
Courtesy of Jeff Eisenmenger, Farm Credit
1. Character. It should be no surprise that personal and professional integrity is a key consideration when someone is deciding to lend money. Are you trustworthy? Does your background support your current goals? The best way to convey your character is to look your lender in the eye and come prepared with a strong business plan.
2. Capacity. The simple question capacity asks is: will your business have sufficient cash flow to make your loan payments? You can let your lender know that you have the necessary capacity by bringing a projected income statement and statement of cash flows. Keep in mind that each lender will have different requirements for financial ratios. One of the most commonly used is Debt Coverage Ratio (DCR) – and the higher the ratio, the better (shoot for 1.2:1 or higher).
3. Capital. Capital is a measure of your net worth, which is calculated as your total assets minus your total liabilities. If your assets are limited and you have significant liabilities –other loans, for example – your capital position won’t be as strong. Different types of loans carry different capital requirements, and in some cases, capital requirements will vary based on the type of operation. If you don’t have the strongest capital position, be prepared to explain mitigating factors, such as help available from relatives, off-farm income, or FSA guarantee or participation loans.
4. Collateral. Collateral refers to assets that can be used to secure the debt – in other words, assets such as real estate or machinery that could be sold for cash to repay the debt if income isn’t sufficient. To assure your lender that you have assets to cover the debt in the worst case scenario, bring lists of your machinery and equipment and legal descriptions of real estate. Keep in mind that the useful life of your asset needs to align with the terms of your loan: a combine with one year of useful life remaining won’t be very helpful for a long-term loan.
5. Conditions. Lenders look at the conditions of the borrower and the overall economy, including within the specific industry of the borrower, and then look for ways to mitigate any risks. For example, a dry-land farmer seeking a loan in the midst of a 100-year drought could mitigate the risk of crop loss, and therefore income loss, with crop insurance.
The U.S. Department of Agriculture hosted a Google Hangout Webinar April 1 to talk about accessing farm and ranch credit, focusing on young farmers and ranchers.
Several different experts attended the session, giving advice on the programs that are available.
“We’ve had a lot of interest in this topic. We all do care very deeply about getting farmers on the farm and ranchers on the ranch. We need producers. Those folks who know me are well aware of this personal passion that I have,” said U.S. Deputy Secretary Krysta Harden.
She continued, “Who’s going to be our bench? Who is going to be farming and ranching in the future? We are going to have an even hungrier world than we have today with 9 billion folks by 2050 who are going to need food. We want to make sure that the U.S. continues to play a big part of that. We want to make sure that all of you have the tools to do so.”
One of the panelists in the discussion was Gary Matteson with Farm Credit Council, and vice president for Young, Beginning, Small Farmer Programs and Outreach.
First, he gave an overview of Farm Credit.
“Farm Credit is not part of USDA or the federal government. We were created by Congress. Now we are entirely run as a cooperative. If you are a local Farm Credit borrower, you are an owner of the local institution that you borrow from. Farm Credit is made up of about 80 independently operation Farm Credit associations around the country. We call it a system, we all get our funding from the same place, but it’s important to note that all of those 80 or so institutions operates independently, as their own farmers elected board of directors, and as an independent regulator that makes sure we keep things in a safe and sound way,” he explained.
He then talked about the types of programs Farm Credit has.
“What it comes down to for a beginning farmer, is each of those 80 or so institutions has their own unique, young, beginning, small farmer program, which comes in two flavors usually. One is offering education and business and financial skills training, and the other way is to give a lower interest rate, and sometimes those are combined,” he stated.
Other expert panelist was Chris Beyerhelm, USDA’s Farm Service Agency Farm Loan Chief. He talked about the different kinds of loans that FSA offers.
“The kind of loans that we have can help all kinds of operations, and all sizes of operations. They can be as high as $1.3 million with our guaranteed loan program, or as low as a few thousand dollars using our new market loan program, which we just started last year. Whatever you would need for a farm or a ranch operation are eligible, so there are no limitations on that,” he stated.
He continued, “We are temporary credit — we specialize in beginning, new and underserved farmers and ranchers. We offer lower interest rates, longer repayment terms and also hands on technical experience, or technical assistance. The idea is, and why we are temporary credit is, the whole idea of FSA loans is to get new, beginning and underserved clients into agriculture. As your financial condition improves, as you improve your production and marketing skills, then we will ask you to go to a local bank and pay us off, we take your money and start someone else up that way. The whole idea is to get you started, get you acclimated and get you prepared to get credit from the commercial world.”
Farm Service Agency offers two other types of loans as well.
“We also offer a unique and good program for kids that are ages 10-20 to help finance their 4-H and FFA projects. An apprenticeship if you will into agricultural production, and then hopefully we don’t have to use this program very often but if your operation is affected by a natural disaster, flood, hail, tornado, we do have disaster loans available to get you back into production and get ready to go again,” Beyerhelm explained.
He then gave advice on how young, beginning and small farmers can get loans.
“The best thing I can tell people is, when you go to your lender, you need to be prepared to sell yourself and your operation. The more homework you can do, the more prepared you are, you know the lender is going to ask questions. Be ready to talk about how you are coming up with your income numbers, how you are coming up with your expense numbers. Be ready to, almost like a job interview, be prepared like you would for that,” said Beyerhelm.
Both experts talked about shopping for credit, and how people can find the best loan for them.
“The more sophisticated you get at that, at preparing and presenting your financials, you can actually shop for credit. You don’t have to be tied to the local bank or farm credit system. If you can walk into any lender and actually sell yourself and your operation, you can actually shop for credit. When you are shopping for credit, do not make the interest rate the primary objective. The primary objective is a lender that knows me and knows my operation and is going to be a partner with me in that, in my farming operation,” Beyerhelm stated.
Matteson agreed. “Beyond the idea of saying, well I can get a lower rate if I take a course of if I apply to this young, beginning and small farmer program, the more important thing I think, is that you begin a relationship with a lender, or more than one lender, so that they know you, because a large part of a lender decision is being comfortable. Before that first visit to the office of any lender, make a phone call and ask, what should I bring? What is it that they want to see? That is part of that relationship. Stop and talk to people at trade shows. They know your name and it’s easier to start a relationship,” he suggested.
He then talked about some of the mistakes that young, beginning and small farmers make when trying to get a loan.
“A lot of the time, I think the mistake is that young farmers approach a lender and think they have to buy a farm in order to be a farmer. You need to know your goal. I think it’s a prudent thing to do. Not every type of farm business that you want to get in to, can you start by buying the land and having that debt for the land that is going to be a crushing burden are you are trying to learn to actually operate the farm. You can get there by operating on rented land with fewer resources for the first few years. Which sounds kind of odd coming from a lender,” he explained.
He added, “The safest thing is that you borrow the money that you know you can pay back. That you have a plan for how you are going to earn the money, and what portion of that money you earn is going to go towards your family living expenses, towards retiring debt, inputs to your business. It’s all about a plan.”
Matteson then talked about the importance of a good credit score, and how that can affect the probability of a lender making a loan. “Probably the most important thing is for somebody to approach any lender, or even a lot of job interview now days, is with a good credit score. That means so much in both borrowing money for any purpose from any lender, as well as applying for a job. It’s become a substitute measure for what it means to be a trustworthy person, to be able to perform to the promises that you have made,” he stated.
Both men agreed that those applying for loans need to know what they want, before they ask for a loan. “You need to love what you do. Come in with a love for what you are going to do, and also understand that it is a business and literally have every capital expense that you make, you need to show how it’s going to pay for itself. Each thing should pay for itself,” said Beyerhelm. ❖
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