Because agriculture is a profit-driven market, it’s not enough that growers only know how to farm. On top of producing crops, you need to be businesspeople, which requires a certain amount of financial intelligence that can’t be found between the rows.
Enter Dr. Greg Hanson, professor emeritus at Pennsylvania State University and president of Farmer Courses LLC. By blending his personal experience in agriculture with a doctorate in agricultural economics, Hanson is the perfect candidate to counsel growers on how best to secure a loan and properly manage their finances.
Devising A Plan, Drafting Documents
Before you make any steps toward acquiring a loan, Hanson says to ask yourself what you’re able to do on your own financially, and what you need help with. Once that’s been decided, Hanson recommends approaching an organization like the Farm Service Agency (FSA) because its programs aim to help beginning farmers, and they offer favorable interest rates and repayment rates.
“The USDA’s mandate is to help farmers get started. The farm loan officer at the FSA will have contacts with other lenders so they can be a source of information on a guaranteed loan, for example, where the FSA may guarantee 90% of the loan to make it more attractive to a commercial bank. They’re sources of not only good loan terms, but information that can be useful,” Hanson explains.
In preparation for your meeting with a loan officer, Hanson suggests devising a written plan. Each written plan should include deadlines for production, projects, realistic goals and objectives that are measured specifically, and a marketing plan.
It’s important to be prepared with these documents, Hanson explains, because some lenders will try to push for information on production to make sure that you are well prepared, and know what you’re doing in the field.
“It’s really good to steer the conversation toward production for both the farmer’s sake and the lender’s sake. The lender should be interested in that information because they want production to be healthy. The farmer needs a lender that’s interested in those minutiae of production. That really helps,” Hanson says.
Another document you should be bringing to the table is a conservative and complete balance sheet with assets, (things you own), debts, (things you owe), and your net worth.
“Bankers tell me that 90% of the balance sheets that come across their desks are full of holes. They’re not complete, conservative, and consistent. If you’re going to value a piece of land or equipment, don’t change that value every six months as the market changes. If we make a mistake or if we paint the balance sheet too rosy in one year, then the next year it will likely come back and bite us,” he says.
Solidify A Relationship With Your Lender
When looking for a lender, keep several key attributes in mind. Hanson suggests finding a lender that’s knowledgeable about the specific type of production you focus on, and understands your goals in yields, operating expenses, and so on.
Be sure to ask the lender what type of lending they’re most experienced in, and if there are any indicators they follow. For example, Hanson says lenders typically look for three different types of ratios: an operating expense ratio, a sales ratio, and a debt ratio. The operating expense ratio is the operating expense divided by sales, the sales ratio is sales divided by assets, and a debt ratio is debts divided by assets. Lenders will vary in their preference for these ratios, so be sure to do your research before you meet.
Character is another key factor Hanson says lenders are looking for in a grower. “They want to work with producers that are honest. And it’s important in that relationship both the lender and the producer respect each other for who they are and what they are. Each farm is unique, each farmer is unique, but it’s important to be on the same page as the lender,” he says.
Managing Your Money
Once you have secured a loan, the next step is to learn how to properly manage your finances. Although it may seem simple, the first piece of advice Hanson offers is to pay the bills when you have the money.
“The money that we have in our pockets and in our checking accounts tends to disappear. Somehow there’s a better use that comes up, or there’s a bargain, and growers will say, ‘Oh, I’m going to buy this bargain tractor’ instead of paying back the money they owe on their loans,” he says.
Secondly, he suggests paying close attention to operating expenses such as seed, fertilizer, or fuel, considering you have the most control over those costs. You also should be monitoring assets including land, equipment, irrigation systems, etc., for the same reason.
Finally, Hanson suggests that you focus on paying off your larger loans if they have them, before you take out smaller ones.
“Some farmers set a goal. For example, they’ll say, ‘Before I add some land, I’m going to pay off all my equipment.’ That way, they’ll get their operating loan not only paid off, but then they won’t need one, and there will be money in the bank to plant with,” he says. “Having $20,000 in the bank to plant with is just really comforting,” Hanson says. “People sleep better at night.”
If interested in more information on loan securement and financing, go to FarmerCourses.com or contact Hanson at greg[email protected].