I've written several columns about preparing for the loan-renewal process and providing your lender with the right information to improve your borrowing chances. But exactly what information should you supply?
It’s important to submit a written document with your loan request because the loan approval process at most banks involves a chain of employees and decision-makers. A written record minimizes the chance of mistakes creeping into the process as your loan request moves from one person to the next. It gives you more control of the process, shows professionalism and can make a positive difference if your lender is on the fence about approving your request.
A good loan-request outline covers four key areas that tell your lender about yourself and your operation:
The first section is simple: “purpose of request.” This is a single paragraph explaining what the requested funds will be used for. Do you need a $1 million line of credit to fund your operation and crop production for 2019? Or a $9 million term note to refinance 1,500 acres of farm ground?
The second part, called “management analysis,” is all about your farm’s background, ownership structure and management overview. This is where you share key events, such as when your business was founded and major changes that have occurred. Among items to include are the names of owners, entity types and a brief narrative of each. For example, you could describe an entity this way: “ABC Farm Land is an LLC that owns 800 acres of irrigated ground that’s rented to ABC Farms. It has a calendar year-end and is owned 50/50 by John and Joan Smith.”
You’ll also want to show rent terms, management fees and lease agreements. Include an organizational chart with the names and qualifications of key team members and a succession discussion.
The third section, “financial analysis,” focuses on numbers for at least the previous 12 months as well as going forward. In reviewing the past year’s numbers, report what worked and what didn’t. Provide a historical financial analysis and use accrual basis financials, not tax returns. You’ll need to show a debt repayment calculation, also known as debt service coverage ratio. Does your budget support the requested debt service? Benchmark your performance. Tell the story behind the numbers.
Analyze your working capital. Project and sensitize your financial performance for the coming year. Are you expecting a 10% increase in grain prices? Yields? Expenses? Include best-case, worst-case and most likely scenarios. Explain your risk management and marketing programs.
The last segment, “guarantor analysis,” explains your ability to guarantee the debt payment. You’ll need to show your balance sheet and collateral. Include a personal income statement that reflects on- and off-farm income against personal liabilities and living expenses. For example, if a spouse works at a job in town, this will provide outside income if payments get difficult.
There are some complicated parts in building this document, so don’t hesitate to talk to your lender or a financial expert if you have questions. You want your document to be as accurate and complete as possible to boost your chance of loan success.
Download a PDF checklist of specific information to include in your loan-request outline here: LoanPackageOutline.pdf