Preparing for your Lender
Management is the greatest single factor that separates successful and unsuccessful purebred cattle producers. One indicator of good management is being prepared before you meet with your lender.Start Early: If possible, meet with your banker three to six months before you will need a loan.
Find the Right Banker: The following questions will help ensure the individual banker you are choosing meets your needs now—and into the future.
Do they have an industry specialty related to yours?
What is the average size of their borrowers?
What is his/her professional background; commercial or consumer lender?
How long have they been in these positions?
How long before they anticipate transferring to another location?
Questions to prepare for:
What is the loan needed for?
How much money do you want?
How long do you want it before it is all paid back?
How will you pay it back?
Answers to the above will help determine the loan amount, term of the loan, size of down payment, security required and any other conditions on the loan.
Understand your financial strengths and weaknesses
Complete a self assessment tool to understand your current net worth, profitability and debt serviceability before you meet with your lender. Lenders will assess your capabilities to service a loan, and the risks they face in lending you money based on these numbers. The lender will ask questions regarding these figures, therefore being prepared for this will be helpful to build your case. The self assessment tool is based on the Agricultural Business Analyzer (ABA) program created by Ron Lyons from Alberta Agriculture and Rural Development.
Visit the Financial Self Assessment Tool page of this website.
Note: At the bottom of the Assessment page it indicates whether you, as a potential borrower, are in the range of, “Good”, “Caution” or “Not Good”. For more details on farm financial ratios, and how to interpret your assessment results, see the following link:
http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/econ2198
Know/Learn about your credit score (Equifax/Beacon score)
It is important to know and understand your Beacon/Equifax score and how it can be managed. An individual’s Equifax score is used by lenders to understand an individual’s payment history on previous loans. Any missed credit payment or deferrals will negatively impact this score. If it is not managed correctly/properly, it may prevent you from receiving the loan, or result in higher interest rate. There are a number of components to an individual Equifax score that need to be properly managed. A detailed explanation is provided in the link below:
Equifax Main Page: https://www.econsumer.equifax.ca/ca/main?link=OPIEM&lang=en
Credit Report Basics: https://www.econsumer.equifax.ca/ca/main?forward=/view/common/template.jsp&body=/view/education/credit_ed.jsp?show=report_basics_llaanngg.jsp
Credit Score Basics: https://www.econsumer.equifax.ca/ca/main?forward=/view/common/template.jsp&body=/view/education/credit_ed.jsp&show=score_basics_llaanngg.jsp
Business Planning and Goal Setting
Understand that the larger amount of debt relative to the value of your assets the higher risk you are to a lender. Therefore, more detailed projection preparations are needed.
Have you developed a plan?
- What is your farm history? Tell them your story
- What are the long-term goals? Growth? Succession? Status quo?
- Who is running the farm? Outline your management team and skill set
- How does this loan fit into the long-term plan of the operation?
- What is your ability to pay the loan back?
- Do you have strategic partnerships? Vet’s, advisors, other producers/established sales
- Competitive Advantages? Cheap pasture? Residual feeds? etc.
Here are links to additional resources:
Business Planning Template and Example for Agricultural Producers:
http://www.farmcentre.com/File.aspx?id=b44db8ff-c6e2-43ab-8173-33c28e51619c
Goal Setting for Farm and Ranch Families:
http://osuextra.okstate.edu/pdfs/F-244web.pdf
Complete a projected cash flow
Show your ability to repay the loan. (A common reason people are not approved for loans is because they are unable to show their ability to make loan payments)
The following link has information to aid you in completing your cash flow.
ABA: http://www1.agric.gov.ab.ca/$Department/softdown.nsf/main?openform&type=ABA&page=information#guide
Complete a summary of net worth
Refer to self assessment tool to see that: Net Worth = Total Assets – Total Liabilities
Understand business risks and risk solutions (market hedging, crop planning etc.)
What is the plan in a worst case scenario?
These links share information on risk and risk management:
http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/bmi9815
http://www.farmcentre.com/Resources/Detail.aspx?id=d39aefc7-0cd9-4e32-83e6-cd630d2a13e6
Financial Records
At a minimum, have financial statements/tax records for the last three years readily available.
Prepare to give up collateral
Know your available assets. (Debt to security ratio is considered important)
Are you willing to contribute other non-farm assets to make this plan work? (Show your commitment to the venture)
Don’t be afraid to negotiate
If you are financially sound, and low risk, you should negotiate better rates, and loan terms. (See results of assessment tool for your strengths and weaknesses) Negotiation considerations include:
- Debt to security levels
- Interest rates
- Length of loan
- Size of down payment
- Repayment terms
- Debt consolidation to improve working capital
- Interest only options
- Pre-approved loan amounts
- Loan fees
