Agriculture Credit – Making the Farm Work

Farm Business Management Update, April 2008 - May 2008

Bill Whittle (wwhittle@vt.edu), Extension Agent, Farm Business Management, Northwest District

Credit woes abound in the popular press. Without a doubt many people have problems obtaining credit at an affordable interest rate or making payments on borrowed money. Few farmers have the resources to farm on any scale without using borrowed money. Both capital and operating loans are often needed. Many farm enterprises must survive for long periods between paydays. To survive between pay checks you need to either have deep resources to draw from or be able to borrow money to survive until pay day arrives. Availability of credit is a resource as important as any on the farm and the ability to obtain credit is key to a sustainable operation. Therefore, it is an absolute necessity to cultivate and maintain a strong credit obtaining ability and to see your lender as a financial partner and not a disinterested party or worse, a meddlesome foe. For many farms that financial partner is a commercial bank or Farm Credit.

You may think credit is all about your credit score, such as FICO or Fair Isaac Score. Though of great value with personal and homeowner loans, your FICO score is less valuable with business loans. Because your lender is your financial partner, it is vital that you develop a relationship with the lender. You need to get to know what the lender is looking for in a client and they want to know you so they can determine that you are a sound credit risk. This relationship development is the first step in strengthening your chances for obtaining credit.

Lenders do not lend money because you need it. They lend money with the expectation that they will receive a return on their investment. You must prove to them that you and your farming operation are a risk worth taking. They know that if you are successful they will be successful so they ask for proof that you can succeed. You develop your proof by being prepared. You need to be able to clearly state what you want, how the money will be used, and most importantly, how any borrowed funds will be repaid.

At a minimum, your lender will want to see an up-to-date financial statement, a projected cash flow on the enterprise, a complete business analysis, and the last three years of income tax statements. Lenders would love to see a well thought out business plan for a new enterprise but are not interested in a boiler plate version.

The common denominator to virtually everything a lender desires prior to giving a loan is accurate financial and production records. If you have kept good financial records you can produce the net worth statement and cash flow projections. If an existing farm has no records or shoddy records, lenders are less likely to loan on the merits of the enterprise and often require substantial collateral. New farmers need to show lenders that they are knowledgeable, capable, and willing to collect and use these records as a management tool.

As a final note, lenders want to see that the borrower has a substantial stake in the success of the enterprise. In short they want to see that the farmer is risking his own money in addition to his sweat and labor. This lack of equity can pose a problem for young farmers getting started. This is where relatives often assist by providing opportunities to earn equity in the family farm or by providing initial loans to begin farming.

Credit is the lifeblood of most farming operations and successful farmers have learned to manage credit as a tool. The successful management of credit requires skill in managing relationships, money (income and expenses), and production. Good credit should be a tool to be proud of and bad credit needs to be avoided.

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