Loans can be a tricky thing to understand, let alone getting one. How does a farmer go about getting a loan?
Doing the necessary prep-work can ensure that a farmer has a smooth experience while taking out a loan. To prepare, a farmer must complete a series of steps. Craig Pollock, Branch Manager of Farm Credit East in Sangerfield, New York, recommends the following five steps:
- Prepare an accurate and complete balance sheet every year and submit it along with their profit/loss statement. This should also include the purpose of the loan, price/cost and the loan amount.
- Explain how the loan will generate profits for the business
- Make an outline of fund sources and uses making up the request
- Write down operating budgets for the proposed venture
- Add evidence of the necessary permits and licenses that may be required
“Needing money is not enough,” he said. “Borrowers need to think in terms of how the additional capital will generate returns and how the business can repay the loan.”
Coming to the meeting prepared allows for more time for quality discussion of the business. At times, borrowers come to the table with preconceived expectations of loans, which those thoughts may or may not be good.
“Managing expectations starts with establishing an understanding regarding the proper mix of debt and equity capital,” Pollock said. “The loan represents the debt capital; think of net work or a down payment as the equity capital.”
However, there are many advantages to applying for a loan.
According to Pollock, obtaining a loan allows the producer to acquire and utilize assets, generate profits and build equity and net work beyond what they may be able to achieve on their own.
There might come a time in a farmer’s life where they might struggle during their loan agreement.
“Each party needs to keep the lines of communication open,” Pollock said. “Talking things through usually results in a solution. The borrower needs to identify how they will adapt and work through the issues to resolve the problems.”
Pollock mentioned that lenders need to be open to rescheduling payments or recasting debt if feasible and borrowers may need to rework their business model if things aren’t going as planned.
Another powerful tool is if borrowers arrange for a consultative resource or outside experts to work with them.
“Successful producers recognize that volatility and increased complexities dictates that they seek out new ideas and potential solutions beyond their farm gate,” Pollock said.
Farmers and growers can use Farm Credit East’s curriculum called “Harvesting a Profit” to better understand the financial process. This free curriculum discusses the basics of financial management. GenerationNext is another program that helps prepare the next generation of producers for managing their farm operations and includes sessions on management related topics.
For the small to mid-size farmer, taking out a loan isn’t a difficult task. Farm Credit East works with all farm businesses.
“There is a great deal of opportunity for these producers to build their business to ensure success, whether it be serving a niche market, differentiating their commodity in some way, controlling costs or diversifying their income sources,” Pollock said.
“Each business presents its own unique challenges and opportunities,” he said. “We give individual attention to each one.”