Our second session was presented by Ron Homann with 1st Farm Credit Services on how to use the ratios and standards.
A first level loan may not require a balance sheet or income statements. If the "score" is high enough then a loan of up to $250k or $500k operating loan may be granted. Their history is good with these types of loans, but much of that is due to the current good Ag economy.
The next level of loan is scored plus balance sheet analysis. Looking for minimum 65% equity and 1:25 to 1 current ratio. These loans can be about twice the size of the first level.
Investor loan approval go through different analysis. These loans would be scored based upon income and up to $1 million level may have less analysis than amounts above that amount.
They use three primary ratios:
- Owner's Equity
- Working Capital to Adjusted Gross Income
- Net Capital Debt Repayment Capacity %
These ratios includes adjustments for estimated equipment replacements and any working capital deficits. The capital debt repayment capacity is on non-land payments.
Probability of default is based on three weightings for solvency, liquidity and capacity with the highest weighting on capacity.