GN-MR-1-GETTING A LOANby Sanne Kure-Jensen
A farmer may wish to purchase equipment using a loan instead of taking on expensive credit card debt for cash flow until harvest brings cash. Most lenders seek similar business information to analyze when considering beginning farmer credit worthiness. Short-term loans are used to finance seeds, fertilizers and/or other annual inputs. This can include cash to help farmers pay their farm and/or personal bills between harvests. Short-term loans are under a year and are repaid after harvest. Intermediate-term loans help farmers purchase capital equipment like tillers, tractors, coolers and have repayment terms up to seven years. Long-term loans for farmland may extend to 30 years.
Gary Matteson of the Farm Credit Council and Benneth Phelps of the Carrot Project shared their recommendations on planning for obtaining credit in a workshop for beginning farmer educators at the Beginning Farmer Learning Network Conference in late 2014. Phelps and Matteson identified the key to success for beginning farmers is to develop good recordkeeping habits their first year. Records are crucial to developing realistic plans for future years and assessing how to improve operations. New farmers should reach out to neighboring farmers, Cooperative Extension staff, farm lenders and other agriculture professionals. Build a network of agricultural experts to help with farm challenges and share best practices.
Lenders need to see your ability to repay a possible loan. For most lenders, farmers will need at least a personal credit score over 660, cash and/or collateral for a down payment, an earnings statement that outlines living expenses and loan payments (new and any outstanding loans). A business plan, income statement, budget, as well as more than 30 percent ownership or equity in the farm business and less than 30 percent of earnings spent on debt payments, things like consumer credit cards or student loans. Most farm lenders seek demonstrated farm training and experience (minimum two years farm apprenticeships, Ag. college program). Many lenders seek at least one year of experience managing a business. A good Marketing Plan and Risk Assessment Plan demonstrate a strong grasp of business and work in the farmer’s favor.
Beginning farmers need at least a basic Business Plan to guide farm operations and to apply for a short-term, cash flow or seasonal loan. Even the simplest plan should sufficiently explain the business to someone who has never visited the farm or seen its operation. They should outline your Mission, Objectives, Goals and Action Plans with a monitoring schedule and contingencies. The Mission guides every business decision. Matteson recommended farmers “keep it simple. Find the core definition of your business.” Develop four to eight objectives that describe what the business should look like in the future. Objectives are general, observable, challenging and business directions. Focus on a few objectives that work towards the farm mission. Matteson recommends developing SMART Goals with deadlines (Specific, Measurable, Attainable, Rewarding and Timed). He said, “A goal without a deadline is just a dream!” Set several goals for each objective. Some goals may apply to multiple objectives. Phelps pointed out that each goal needs a precise Action Plan or tactic with its “5 Ws:” Who will be in charge of What? When will a milestone will be due and Where and How (or How often) will activities take place to achieve each goal? Successful Action Plans have regular monitoring schedules, comparisons to appropriate baselines or standards and plans for corrective action as needed.
To create an income statement, last year’s records offer a good starting point for a modest 5-line Income Statement. The purpose of a 5-Line Income Statement is to reduce to simplest terms the financial goals of the farm business so those goals can be remembered and acted upon. The basic 5-Line formula is “Sales – Cost of Goods Sold = Gross Margin – Overhead = Profit”. Ask a neighboring farmer, Cooperative Extension staff or other agriculture professional to review your plans and make suggestions for expanded versions. If the budget and plan numbers work and meet other general requirements, a farmer could be ready to visit a loan officer for advice or to apply for a farm loan.