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Agribusiness Financing Options: What’s Out There?
When an agribusiness prepares to find a lender, sometimes understanding what the lender needs can be daunting. While gathering the necessary information, know that both the borrower and the lender have a mutual goal: they want to ensure the long term viability of the agribusiness.
By Katie Epstein, executive loan officer, Ag Choice Farm Credit, ACA
Applying for a loan can be an overwhelming quest, depending on your comfort level with what’s needed by the lender. At the upcoming PICPA Agribusiness Conference we’ll dive into what’s needed when you prepare to find a lender. Both the borrower and the lender have a mutual goal: they want to ensure the long term viability of the agribusiness. For the borrower, this can mean having access to capital that is structured to meet their needs; for the lender, they are taking on risk with the expectation that the borrower’s business will prosper. For the lender to assess this risk, a bare minimum of the following is required:
- A clean credit bureau report
- Three years of tax returns showing an operation that is typically profitable
- A current balance sheet showing an appropriate amount of equity and liquidity
The credit report is the first step in the door. The lender uses this as a quick assessment of credit risk. If acceptable the application moves through the process to a review of tax returns and the balance sheet. The tax returns are used to verify the ability to repay the loan. The entire return is reviewed to understand the sources of the income and whether or not it will be recurring. Depending on the size and risk of the loan, tax returns are often used to build a trend to show consistency -- or lack thereof. The balance sheet shows assets, liabilities, and net worth, yet it reveals much more to the lender. It can show how assets are being used, what is available for collateral, and the ability to withstand adversity.
For a new business, in addition to the above the lender will need a written business plan and three years of projections, including cash flow projection and sensitivity analysis.
CPAs play a key role in providing the components necessary for financing. As the complexity of the loan request increases, so will the quality and quantity of documentation required. At the conference’s Agribusiness Finances session we’ll dive in to how this information is used to assess risk and determine loan approval and structure.
In addition to documentation, it is important to have an open discussion with the lender to explain the reasons for the loan request. They’ll need to understand the importance of the loan, what changes it will bring to the operation, and what it will help the business achieve. For example, will additional funds allow the farm to pick up acreage, or exchange a rent payment for a mortgage payment? Only through this complete picture will the lender be in a position to offer a loan with the best structure to meet the needs of both the borrower and the lender.
In addition to loans, the information outlined above also is used to assess leases. This may include leases of vehicles, tractors, equipment (mobile or fixed), buildings, barns, and more. A leasing company allows the use of equipment or machinery while a periodic lease rental or payment is made. Leases may provide tax advantages, little or no down payment, and lower monthly payments.
All this and more will be discussed at the Agribusiness Financing Options session of the Agribusiness Conference on July 21 in Lancaster.
Katie Epstein is an executive loan officer with AgChoice Farm Credit. She is a graduate of Cornell University, where she double-majored in animal science and agricultural finance. She is a strong supporter of agricultural programs, serving on several boards.
