Business of Agriculture: What to Expect when Applying for a Loan

By Tony Powell

The Business of Agriculture series covers finance, accounting and other business topics to help both beginning farmers and ranchers as well as experienced operators. Tony Powell is a Credit Manager at Western Ag Credit's South Jordan, Utah office. He's worked for Farm Credit for 10 years. 

Agriculture is a capital-intensive business, and for most operators, especially new farmers and ranchers or those looking to undertake a significant expansion, meeting these financial needs means applying for a loan. Applying for a first loan can be intimidating, but with adequate preparation you and your lender can determine the feasibility of your loan application and help get you started down the right road to success in your agricultural endeavors.

When you first call your local Farm Credit office, you’ll be put in touch with one of our experienced loan officers, all of whom understand the unique demands of agriculture and many of whom also have expertise in specific sectors of the industry. The loan officer will ask you a few questions to gain a general understanding of your loan request, and will schedule an appointment with you to discuss your financial plan and business operation in more detail. They’ll also tell you what information and documentation to bring to that meeting so you’ll be prepared for the discussion. The size and complexity of the loan will determine how much information you’ll be asked to provide, but the documentation requested will usually include:

• Financial statements, including balance sheet
   
• Historical earnings information, such as tax returns or business records
   
• Business plan including description of your operation, your cash flow projections and your marketing plan
   
• If applicable, information on any assets that you’re looking to acquire
   
• For real estate loans, a purchase agreement, legal description of the property, description of any water rights, and listing of any assets that are included in the purchase (irrigation equipment, barns or other structures, etc.)

During your meeting, you’ll review the information with the loan officer and be asked to fill in any details. In general, your goal in this meeting is to demonstrate a well thought-out plan for what you’re trying to achieve and how you plan to get there. The loan officer will also have you sign authorizations to allow the bank to run credit reports and verify your assets.

After the meeting, the loan officer will review your documentation and business plan, run credit checks and other verifications, schedule any needed collateral appraisals and compare financial ratios based on your financial statements against the lender’s underwriting standards. A big part of the loan analysis will be centered around the Five Cs of Credit: Character, Capacity, Capital, Collateral and Conditions. From this analysis, the lender will determine whether or not to approve the loan application.

If the decision is made to provide the loan, the lender will present the borrower with a loan offer which will include proposed terms and conditions. The lender and borrower should discuss the loan offer and determine if the structure and conditions meet the needs of both parties. If the loan is not approved, the lender will usually explain the reasons behind that decision, and what steps the borrower can take to have the loan approved in the future. For example, the loan size might exceed the collateral value, or the borrower may not have enough equity in the operation, conditions that may change in the future.

For more information or to discuss a new loan, contact your local Farm Credit lender.