Sponsored By
Corn+Soybean Digest Logo

When the collateral is not thereWhen the collateral is not there

Road Warrior: For young farmers, the challenge of attaining financing can be met with preparation. Here's what you need to do.

David Kohl

August 16, 2023

2 Min Read
Reviewing loan papers

This is the season of young and beginning farmer and rancher conferences, which are full of interaction, engagement, and great questions. During a conference the other day, a group of aspiring young producers asked how they can enhance their chances of securing loans in a higher interest rate environment. First, let's go to the other side of the desk and examine this situation from a lender's perspective.

Agricultural lenders must examine risk and the repayment probability of financial obligations in a timely manner. Within this context, they must analyze a loan from many different angles with collateral, often as land or real estate, as the ultimate backup. This is where the older, more vintage producer often has the advantage because of the wealth built up over the farm lifecycle or multiple generations and decades of appreciation and earnings. This requires a less tenured producer, without the equity and assets, to take a different approach. In many cases, your success obtaining credit will be based on your potential to present a plan with strategies and actions and the confidence to execute and have a system in place to monitor your plan.

Step one is to develop a written business plan that articulates your core values and short-term and long-term goals. Next, have your finances in order. Develop both personal and business balance sheets that include a detailed list and description of machinery, equipment, and cattle inventory. If you are already in operation, include at least three years of historical income statements. A schedule F tax form is acceptable as an income statement, but an accrual adjusted income statement with changes in the big six (inventories, accounts payable, accounts receivable, prepaid expenses, supplies, and accrued expenses) will be the icing on the cake to present a true representation of business profitability.

Develop a monthly or quarterly projected cash flow with financial sensitivity testing in at least four areas such as production, prices, costs, and interest rates, particularly if your proposed or existing debt is structured with a variable interest rate. This will illustrate that you have critically thought about the assumptions that could either enhance or derail your pathway to business success.

Having knowledge of and understanding a few of your lender's favorite ratios will be beneficial when discussing your finances with a lender. Some of the more popular ratios examined by lenders include the debt service coverage ratio, working capital to expenses, current ratio, debt to asset ratio, and the operating expense ratio.

While all of this may seem unfair to a beginning producer, each of the aforementioned suggestions can enhance your management skills and ultimately improve the profits and cash flow that are used to repay loans, reduce the risk to the agricultural lender, and make your business more sustainable in the future.

About the Author(s)

David Kohl

Contributing Writer, Corn+Soybean Digest

Dr. Dave Kohl is an academic Hall of Famer in the College of Agriculture at Virginia Tech, Blacksburg, Va. Dr. Kohl has keen insight into the agriculture industry gained through extensive travel, research, and involvement in ag businesses. He has traveled over 10 million miles; conducted more than 7,000 presentations; and published more than 2,500 articles in his career. Dr. Kohl’s wisdom and engagement with all levels of the industry provide a unique perspective into future trends.

Subscribe to receive top agriculture news
Be informed daily with these free e-newsletters

You May Also Like