Knowing the five credit factors

In the financial services business, we rely on five credit factors when reviewing loan applications. As a borrower, you, too, should use these factors to your advantage when managing your business.

The five factors are capacity, capital, collateral, conditions and character. Let’s examine each one more closely from a borrower’s perspective.


Capacity addresses profitability and repayment ability, actual and projected cash flow, and sustained earnings. A lender will analyze past and current business trends focusing on repayment of term loans from earnings while providing an adequate margin for capital expenditures, other capital requirements and contingencies.

In 2019, producers will face continued tight margins. However, there is potential for those who are prepared. Keeping a current balance sheet and marketing plan is essential. Projections should be realistic and consistent with historical performance. And, don’t forget to include your family living costs.

Begin by knowing your costs and your breakevens. Take a look at your cash flow and then stress test it. For example, apply a 10 percent decrease in income, a 10 percent increase in expenses and a 3 percent increase to interest. Would you still be profitable? Think about how you can work to mitigate or monitor these risks throughout your farm operating cycle. Prepare now to limit that kind of exposure. Looking at the big picture helps you to be realistic and plan accordingly for the future.


Capital refers to the financial structure of the business as measured by solvency and liquidity. Asset quality, debt structure, and financial trends of the business are based on accurate and verifiable historical and current balance sheets, together with income and expense statements of comparable date when appropriate.

Some producers have been able to preserve working capital but many have been depleting it. Operating expenses have generally been steady but 2019 is shaking out to be a challenging year on liquidity. This means now is a good time  to review all capital positions.

Committing to the importance of working capital means you understand your operation’s strengths and weaknesses. Evaluate ways to preserve cash and carefully consider any capital purchases especially non-income producing assets. Also, consider the impact non-farm purchases and expenses have on your balance sheet. Remember, your liquidity and financial strength should be sufficient to allow you to continue to operate through a period of significant adversity.


Collateral addresses quality of the asset, value, title and lien position. The relationship between the loan type and the value, useful life and marketability of the collateral asset are reviewed.

As we head into 2019, it is realistic to think that a lender will expect more based on trends. Review your accounting and asset values to ensure they are accurate based on the current market. Maintain your existing asset base including health of livestock, condition of equipment and risk protection. You may want to seek additional information on valuation as values may be more volatile than years past. Always vet your options using your business plan to make sure any changes to your collateral make sense.


The lender controls the conditions of loan approval. As credit risk increases, conditions become more critical to the lending decision. Conditions address loan purpose, amount, structure, account verifications, pricing, and scope of financing.

As credit risks increase, conditions become more critical to the lending process. Lenders will want more detail to accurately determine the risk and what you are doing to mitigate it. Be prepared to share your financial history and your future plans. This is your opportunity to build confidence with your lender. The proper use of credit, honoring expectations and open communication about changes are keys to success.


Consideration of character involves evaluating the applicant’s eligibility to borrow; honesty and integrity evidenced by previous contractual performance and credit references; management ability, including financial, production and marketing skills; and the ownership structure under which the applicant conducts business.

Character may be the most important factor that you can control especially in 2019. Showing your management ability by not only raising a crop but managing costs and marketing with a plan instills trust. Your willingness to communicate and treat your farm like a business is the foundation to building a solid relationship with your lender.

Finally, a lender will analyze the above five credit factors to determine if the credit risk is acceptable and consistent with sound business and credit practices. This approach ensures that each loan is made on a sound basis for the lender but more importantly for the applicant. With that in mind, know that sometimes the best answer from a lender is “not right now.” That may be the competitive advantage that keeps you farming year after year.

Tyler Keatts is the FCS Financial Vice President in Springfield, Mo.


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