Does your loan officer have the knowledge to finance your farm operation?
By Joel Harlow
I have been fortunate enough to spend my 30-year career primarily in agricultural banking, originating agricultural real estate and operating loans. With the changes in the banking industry, agricultural finance is often a challenge. There are several steps you can take to enhance the lending process:
1 The right bank and banker. If you are looking to finance a multi-million dollar operation, you want a bank with the resources and capital to meet your needs, especially if expansion is in your future.
One way to see if a bank is right for you is to look at their annual reports—commercial bank reports can be found on the FDIC website, www.fdic.gov. The Farm Credit System Association also publishes annual and quarterly reports on their respective websites.
Look and see how involved the bank is in agricultural loans? What is their agricultural loan volume compared to other types of lending?
Visit with the loan officer you will be dealing with to learn about the bank and his or her interest level in your needs. Explain your operation, credit needs and future plans. You will know within a few minutes whether or not the loan officer has the knowledge, background, expertise and
desire to finance your operation.
Make sure your loan officer has the authority to make day-to-day decisions on simple requests and that he or she is available after banking hours.
2 Reasonable expectations. Agricultural operations can be simple or they can be multifaceted and complex. You need to be prepared to provide your financial records including IRS returns, profit and loss statements, balance sheets and a plan of operation (if you are expanding or changing your operation) that shows the financial impact.
The more complex and diverse the operation, the more information the lender will need. If the operation is a partnership or corporate entity, be prepared to provide tax returns and balance sheets from the owners of the entity, as well as the entity itself.
A lender must be able to project cash flow and know the financial strengths and weaknesses of the corporation or partnership and its owners. I typically want to see the entity’s bylaws and corporation filings, as well as engage in a discussion as to what the operation wants to accomplish.
On smaller farming operations, a Schedule F from personal tax returns as well as a financial statement on the owner and two to three years of tax returns is likely sufficient.
From a lender’s perspective, it’s frustrating when a farmer says, "You already have that information from my last loan." Well, yes, I might have financials from two years ago, but they are useless in considering a loan request today.
A good loan officer will go through an application and make a list of needed information to make the loan decision. If a loan officer is constantly asking for additional information, he or she might not understand agricultural lending enough to know what they need to make a decision.
3 The five C’s. Most agricultural lenders go by the five C’s of credit:
- Character: Does the applicant have a history of repaying his debts and possess the experience and managerial ability to have a reasonable chance of success?
- Capacity (to repay the loan): How will the loan be paid? Does the applicant have the resources to repay?
- Collateral: Is the collateral marketable? Will it adequately secure the loan? (Cost does not always equal value, especially when dealing in specialized equipment.)
- Conditions: What are the current conditions in the industry? Is theapplicant in the financial position to weather the storm if conditions are not ideal? This also covers what loan funds will be used for, such as expansion, operating expenses or change in direction of the operation.
- Capital: How much does the farmer have invested in the operation? A lender has a greater comfort level when farmers have "skin in the game" because they will be less likely to walk away when things get tough.
4 Caution regarding the five C’s. Beware of lenders who look at collateral as being the most important "C" of the five C’s. Collateral only becomes important in the case of liquidation and in reflecting the producer’s confidence in his plan of operation. Collateral is irrelevant if the loan is performing.
A good lender will be cognizant of collateral but will place more weight on the other four C’s. At the end of the day, if the character of the farmer is in question, none of the other four C’s will matter.
Just like any other relationship you build in your farm business, the one that you develop with your bank and lender is key to your operation’s financial health for years to come.
Joel Harlow currently serves as the executive vice president of First State Bank of Ben Wheeler in addition to ranching in Texas.