Are you a worthy partner for your lender? Dakota Everts, a Growing Forward specialist with Farm Credit Mid-America, helps people answer that question across the Midwest. She discusses the relationship between lender and borrower within the ag industry. Everts helps educate customers in areas of finance including succession to the next generation and helping young farmers become established.
A big piece of farming, especially for young farmers, is obtaining necessary financing, Everts says. By doing their homework and becoming familiar with things such as solvency, term of loans, income statements and business plans, younger generations will be better prepared. They’ll be able to prove that they’re not only responsible, but also willing to do what’s necessary — even if it’s as simple as filling out paperwork and forms, she says.
Why be proactive
Active initiation on the borrower’s part looks less risky to the bank. A borrower that won’t or can’t fill out his or her own balance sheets is a red flag, Everts says. The borrowing partner needs to take that initiative and responsibility.
Many things can be financed for agriculture: real estate, operating expenses, livestock, equipment and more. Certain components create a more worthy partner. Before applying for any type of farm credit, make yourself aware of those components. A bit of effort will result in a well-prepared loan application, Everts says.
A credit score is like a resume. The first step is making sure your credit is in order. It’s worth the time to not only know your credit score, but to understand the reasons behind the score, as well.
Some resources and options for young and beginning farmers can be found at fsa.usda.gov. The Growing Forward program also offers opportunities with fewer restrictions for those younger than 35 and those beginning with less than 10 years of farming experience.
1. Know your credit score. A credit score is an indicator to the lender of the capacity to repay a loan, Everts says. Lenders need to be confident in that ability to be willing to finance.
A credit score is a three digit number ranging from 300 to 850. The higher the number, the better the score. A good goal is to shoot for 700-plus, she says.
The three main sources for credit scores are FICO (most used), Experian and PLUS score. The “cringe zone” for lenders is 650 to 675 and lower. Monitor your credit often but not constantly — that can bring your numbers down. Here are two monitoring resources: annualcreditreport.com and creditkarma.com. Check for possible fees.
2. Understand what makes up the credit score. The formula is 35% payment history — primarily making payments on time; 30% outstanding credit/limit; 15% length of relationship with card; 10% credit mix and 10% new credit. Everts notes that older cards have more leverage, and “credit mix” refers to having a variety of credit sources.
3. Follow these credit card rules. Everts says it boils down to having different types of credit cards, making payments on time and having no more than three cards per person. Also, if it’s not in the bank account, don’t put it on the credit card.
McClain writes from Greenwood, Ind. This is the first in a two-part series that explores what lenders look at most and what they expect from borrowers.