When applying for an agricultural loan, there is much for bankers to analyze. Bryan Jefferson, a loan officer with First Service Bank in Yellville, Ark., noted that your credit score and income, how much you can pay a month, how much you are wanting to borrow and the value of the collateral on whatever you’re purchasing, are things to be considering when preparing to apply for a loan.
Jefferson said he will ask questions like, “What is the outlook for their future employment, future income? What kind of records do they keep?
“I like to physically look at the farm, to see what kind of shape it’s in. How do they take care of it? How long have they owned (their farm) and been in business if they’re not buying new, and what’s the market outlook for their type of farming? What kind of equipment do they have, and what shape is their equipment in?”
Also, the amount of years experience and the knowledge about the kind of enterprise a farmer is getting into factors into the loan considerations as well, Jefferson added.
Jefferson said that while a precise “business plan” that many small business lenders require may not be necessary, a sound financial statement is.
“A lot of it depends on how big their operation is. Mainly we need a financial statement and a couple years tax returns to see what they’ve done in the past. Probably some type of written statement of goals, what are they looking to do in next five years wouldn’t hurt. Not a set in stone type of business plan; a lot of people farm part time, have a town job and 20 cows somewhere and are not trying to make their whole living from it,” Jefferson said.
Managing Your Risk and Theirs
When it comes to your bank managing the risk a loan with you presents, it becomes a balance between a subjective judgment call and the numbers on paper. “Do they have experience in that business? To me, it’s a gut feeling. If you examine (a customer’s) financials and their financials tend to be solid they’re probably pretty good managers.”
Jefferson said managing risk requires an overall picture of a customer’s financials, their current occupation, their current status on the farm.
“A banker has to make every effort to dig as deep as he really can. What type of character a person has, credit worthiness, there’s a lot that goes into it.
“And, you have to have bottom line paperwork to back it up. They need a knowledge of a working farm, knowledge of markets,” and, he said, customer and banker both must determine what the potential for success is. And so often that is proven by past performance. “And, something that looks good today may not look good six months from now. After the price of oil jumped, nothing looked good. But things change,” Jefferson said.
Record Keeping
“The more records you keep the better off you are,” Jefferson said. He believes cattle records like the age of your cattle, how many calves you have, gives him a better handle on what you’ve done in past and what you’re going to do in the future.
“A lot of people don’t know if a cow misses calving in a year. I’ve been guilty of that. When you work full time it’s hard to look after cattle like you should, but it is very important. The better records you keep the better off you’re gonna be when it comes time to borrow money. I’m going to think, okay, he’s taken care of his operation. He knows what’s going on. He’s gonna continue to do that.”
Collateral and Down Payments
Maintaining an appropriate loan to value ratio is important when considering collateral for the loan. Jefferson said is it important that as a lender, they must try to stay within a certain loan to value limit, usually about 75 to 80 percent. This means that whatever you put down as collateral will cover at least 75 to 80 percent of that loan, if you default. “Those numbers are a rule of thumb, but we don’t always hold to it. However, if a guy wants to buy a tractor and he can pay 10 to 20 percent down, it’s just that much better for him. His payment won’t be as much, and we can do a better loan to value, and we can probably give a better rate.
Too Much Debt
Another factor when considering a loan’s merit is asking how much debt the customer already has, and how are they managing the debt they already have. Jefferson asked, “Can they handle all their debt? In all honesty, if you have to say no, really you’re probably doing them a favor. They may not think so but loaning someone more money is not always the best thing for them.”
