How to approach a lender: Tips for getting a farm loan

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Farming 101: Approaching a lender

 

 

Before approaching a lender, ask yourself these questions: How much money do I need? Why do I need it? And how will I pay it back? If you can’t answer these questions in detail, you will have a harder time getting approved for a loan.

1 Business plan
“You can’t just walk into a lender’s office and say ‘I want to raise turkeys’,” said Tina Mellinger, farm loan officer for the USDA’s Farm Service Agency in Ohio. “Have you ever raised turkeys before? Have you done your homework? Do you have a plan?” Having a thorough business plan or loan proposal can show a lender just how well you have thought your business idea through and how you plan to pay back the money you borrow.

2 Capacity and capital
A lender will look at your financial ability to pay back a loan (your capacity) by reviewing documents such as a cash flow statement, farm balance sheet and business history. “Any lender is going to look at your working capital position (current assets),” says Mellinger. “Is there enough to pay your current liabilities.”

3 Collateral
Collateral are the assets you own that the lender can use as a backup to recover funds should you default on the loan. “What non-farm assets can you pledge?” says Mellinger. And are those assets worth the value of your loan.

4 Character
The general impression you make on the lender can determine your eligibility for a loan. Lenders will look at your qualifications, experience and management skills, as well as your personal credit and they will determine whether they believe your business plan will succeed. Preparation is key to making a good impression with a lender.

5 Risky business
Above all, the lender is going to take into account their risk in investing in you. How risky is your farm enterprise? What are the current economic trends of the farm’s commodity and/or markets? Do they make your future success more or less likely? All lenders have a goal of getting their money back with interest. If you are a higher risk, it may mean putting more money upfront, paying a higher interest rate, or not qualifying for a loan.

Source: Tina Mellinger, Farm Service Agency and University of Vermont Extension

(Farm and Dairy is featuring a series of “101” columns throughout the year to help young and beginning farmers master farm living. From finances to management to machinery repair and animal care, farmers do it all.)

Other useful links: Obtaining financing

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