Jul 5, 2011

Farm lenders seek diverse asset base, good records

While the lending market remains sluggish, loans are being made – albeit in limited quantity to qualified borrowers.
Lenders want to see accuracy, a good credit history and a regular payment record. They also like a performance record of sales growth plus a diverse asset base.

Lenders generally rely on the four Cs when deciding whether to grant a loan: Cash – how much you’ve got. Collateral – hard assets i.e., real estate, equipment, etc., that may be used as security. Credit – your bill-paying history. Character – are you a worthy risk?

If you can satisfy at least three of the four Cs, your chances are good at obtaining a loan. However, the greater the risk you’re perceived to be, the higher your interest rate will be – or you’ll be required to pledge more collateral.

“Your reputation is very important,” said Russ Story, a financial adviser in Douglas, Ga., with numerous farmer clients. “Local bankers know the farmers. The relationship can go a long way in making the bank feel comfortable when making a loan.”

Story said lenders like farmers with diverse holdings.

“Diversification helps reduce risk. Investments like stocks and bonds help lenders see that repayment may not be dependent on one crop or asset class,” he said. “Some of my most successful farmer clients have diversified. The temptation may be to buy more land in good times, but history has shown the benefits of not having all your eggs in one basket.”

Other tips from Story: Keep your books in good order, respond to a lender’s request for information within 24 hours and pay your taxes and other debts on time.

When you talk with lenders, explain your business and its cash needs. Do not expect the lending representative to know the ins and outs of your business. Explain your experience, relevant education and how and when you expect a profit. Lenders want you to succeed – it’s how they make their money. They do not want to seize your land.

Al Rose of Red Apple Farm in Phillipston, Mass., has been a client of Farm Credit East, a specialty lender serving the Northeast agriculture market, since 2001, when it offered a program to help young farmers.

“They understand farming,” he said. “My local bank pitches me but I don’t borrow from it.”

Rose, who mainly relies on an operating line of credit to help with general expenses, said: “It’s about the relationship. View the lender as a partner and build trust.”

While banks are more comfortable once they can attach real estate to a loan, the borrower takes on significant risk. A credit line can help meet operating capital shortfalls. Usually provided by a bank, the borrower can annually take, at his or her own discretion and in predetermined increments, a certain amount of capital. Credit lines are often for less than $200,000 and based on accounts receivable and current inventory. It’s not advisable to rely on one line of credit for long-term investments or major purchases, because interest rates and late fees can rapidly compound.

“Farmers have loose operating controls on cash and are way too trusting,” said Roy Henshaw, a CPA with Rucci, Bardaro & Barrett in Lexington, Mass. “Farmers tend to ‘co-mingle’ business and personal funds. Banks are adverse to this. Banks now look for new and diversified revenue sources such as energy, agritourism, rental income and consulting, and prefer lending to entities such as LLCs or corporations instead of partnerships. Protection from other creditors is critical. Banks will try to get as much collateral as possible and wind up holding more than they need. Minority-owned and ‘green’ farms are more apt to get a loan.”

“Historic performance is a key indicator of future success,” said Clay Worden, managing partner at McGladrey, a tax and consulting firm in Orlando, Fla. “Past performance gives the bank a perspective of what kind of customer they are going to be, which is why being prepared with sound financial records is key. It’s tough to make an informed decision on a farming company with poor records. Records can be supported by data showing how they have done compared to the general market.”

Numbers don’t always tell the whole story. There are intangible assets some banks will consider, such as your experience, competition, whether you’re in a growing market and whether your product or service is unique. Once you do get a loan, be sure you understand the payment terms and have a manageable interest rate.

Help from USDA

Farm loans are provided to family size farmers and ranchers who cannot obtain commercial credit from a bank, Farm Credit System institution or other lenders. These loans can be used to purchase land, livestock, equipment, feed, seed and supplies, or to construct buildings or make farm improvements.

Beginning Farmer and Rancher Loans were developed for individuals who have not previously operated a farm or ranch, or who have operated a farm or ranch for less than 10 consecutive years.

Downpayment Farm-Ownership Loans were developed to help beginning farmers and ranchers purchase a farm or ranch. These loans provide a way for retiring farmers to transfer their land to future generations.

Emergency Loans Assistance was developed to help producers recover from production and physical losses due to drought, flooding, other natural disasters or quarantine.

Farm Storage Facility Loans were developed under the Commodity Credit Corporation Charter Act to create loans for producers to build or upgrade farm storage and handling facilities.

Farm Ownership Loans can be used to purchase farmland, construct or repair buildings and other fixtures and promote soil and water conservation.

Farm Operating Loans may be used to purchase items such as livestock, farm equipment, feed, seed, fuel, farm chemicals, insurance and other operating expenses. They can also be used to pay for minor improvements to buildings, costs associated with land and water development, family subsistence and refinancing debts under certain conditions.

Loans to Socially Disadvantaged Farmers/Ranchers give them the option of buying and operating family size farms and ranches.

Youth Loans are given to individual rural youths who desire to establish and operate income-producing projects of modest size in connection with their participation in 4-H clubs, Future Farmers of America and similar organizations.

The Nonrecourse Marketing Assistance Loan and Loan-Deficiency Payment Program provide producers interim financing at harvest time to meet cash flow needs without having to sell their commodities when market prices are typically at harvest-time lows.

For more information, visit USDA's website.

By Joseph Finora, FGN Financial Writer