Managing Your Credit Worthiness

Farm Business Management Update, February/March 2005

By Bill Whittle (wwhittle@vt.edu), Extension Agent, Farm Business Management, Page County

Today's farm manager contends with volatile prices and accelerating input and land costs that have combined to make financial management as important to survivability as production management. The ability to obtain credit is a valuable tool in managing finances in today's business climate. As you seek financial assistance, you should be prepared to "sell your story" to the lending institution. The Agriculture Lenders Handbook discusses how you can best prepare for requesting credit. These suggestions are not just for a one-shot attempt to obtain credit but are integral parts of a sound farming operation.

First, you must have a good set of records. An accurate, complete, and properly organized set of statements such as net worth, operating results, and cash flows are essential. If developed annually good records will show you and your loan officer how profitable the business is, which individual enterprises are profitable, and the money available to make payments, to meet family living expenses, and to provide for new investments. The records can tell you when sales are expected, expenses are scheduled, and payments due.

You need to prove that you are an above average manager capable of generating the cash flow needed to borrow large amounts of capital. Many lenders have standard guidelines to measure the farmer's overall management ability. It is vital to know these guidelines and attempt to measure up to them. (Your success can be measured in the production of livestock, crops, and general resources such as land, labor, and capital.)

Don't wait till the last minute to request a loan. Plan ahead and develop budgets, including projected incomes, expenses, and investment costs, and be prepared to discuss these with your lender. Show the lender how your request fits your overall goals and objectives.

Your lender is a partner in your farming operation; invite your loan officer to see your operation so he/she can understand your specific circumstances: your goals, objectives, skills, strengths, and any limitations to your business. Your job is to educate the lender regarding the on-the-farm aspects that can change rapidly.

Agricultural lenders frown upon having credit from numerous places; therefore, keep your debt consolidated. Past due accounts with agri-supply firms often create suspicion regarding a borrower's repayment and financial management ability. If problems arise, keeping numerous lenders informed is more difficult than keeping one lender informed.

Discuss problems and unfavorable situations such as weather, prices, costs, and disease with your lender before these problems escalate and create difficulty meeting debt obligations. If you are having problems meeting scheduled payments, immediately have frank discussions with your creditors so that a solution can be worked out.

Share credit decisions your wife, partner, and family members involved in the operation. Open communication and cooperation allow a lender to better understand how a loan request fits into both your goals and your family's goals and lifestyle.

Farming is unique because it represents a large investment with small cash incomes. You must be willing to sacrifice to build cash reserves in favorable years that provide working capital and living expenses in unfavorable years. You must continue to live modestly and keep personal consumption and farm capital expenditures within reason even in favorable years.

In conclusion, remember that reputation is still important in the farming world; make every effort to maintain the reputation of being honest and dependable. A good reputation will not guarantee you credit at low rates, but it will enhance your ability to work with lenders.

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