Financing at the Farm
What are the top things to look at when evaluating a business and looking to get a loan for expansion?
Bryan Hodges, a loan officer at First National Bank of Green Forest, in Green Forest, Ark., explained that there are many factors involved in determining if a person or a business should be qualified for a loan. “Depending on the type of request, business or individual, we still look very closely at the character of the individual or business. We take a look at their history in management of the farm or of their operations.” Other considerations include character, credit history, experience and whether or not they’ve had loans in the past and understand how the loan process works.
Some other factors Hodges said will be considered when evaluating a cattle operation include determining if the person has adequate means of repayment. “Something that’s very important is cash flow. What kind of margin do they have in their cash flow,” Hodges asked.
Farming is a very risky business. Much of the means for profit depends on the market at any given time. “What is the (producer’s) ability to work through the challenging times and make repayment when asked,” Hodges explained is another question he asks.
Another area that Hodges, and other financial institutions analyzing loan applications, will look is net worth.
Also, many bankers you will go to for a loan will not be in the dark on cattle operations, themselves. Hodges said many bankers will ask questions like, “Have they looked at acreage needed to support those cattle? Land, grass, depending on the size of the operation, is there ample water and forage to be able to support the number of cattle they have in mind?”
When analyzing loans for feeder cattle, Hodges said he and his colleagues will analyze the producer’s ability to sustain those cattle. “Access to feed is a very important factor. Feed and grains are very important sources for supplementing those cattle,” he said.
How will the producer get the feed needed? Will it require an operating loan?
Hodges said in many situations, banks will ask for some form of collateral to secure their investment into the producer’s operation.
But even if you seem to fail in one area or another, don’t lose hope on getting approved for a cattle loan, land loan or even operations loan. Hodges reiterated the fact that, “It’s a package. We take a look at the whole package.”
What are the major factors keeping folks from getting a loan?
“Again, we take a very close look at management experience. Have they had farming experience before?” Hodges asked. There are many people who’d just like to get into the cattle business, but there’s a lot more to purchasing cattle and placing them out on the land, he warned. “We like to feel comfortable that they’ve had some experience in the cattle business. Do they have an eye for cattle? Can they make good choices when it comes to the selection of a bull, choosing replacement heifers?” he said.
Another major factor when turning down a loan application is credit history. “Credit history shows a history of repayment, it shows if they’ve had loans in the past, it can show if they can take care of business and make payments on time,” Hodges said.
What documents will I need when applying for a loan?
Hodges explained that normally, you will be required to supply all personal information that comes with any normal application. Along with that, he said he would like to see a current financial statement showing the person’s assets and liabilities. But ultimately, what you may be required to provide will depend on the loan amount requested. “The larger the loan, the more detailed we’ll get, he said.
Usually most financial institutions will take a look at two to three years worth of tax information.
And for people just getting into the business, Hodges explained the different requirements. “If they haven’t had experience in the past income to show history on, (we will) look at projected history, projected cash flow.” He said they may also request an applicant to provide balance sheets for the next two to three years for a projected cash flow. “This tells us how much the applicant knows about the process and management of a cattle operation. It shows us how well they understand what expenses might be involved with that operation.” Then the lender can also provide experienced service and make sure the applicant hasn’t forgotten anything that could be crucial to the operation’s success. “From the income side, with the fluctuation of markets, a projected cash flow for new farmer or cattle operations is very crucial.”