Know before you go: three tips before going to the bank

Nov 29, 2013

In this time where visions of low-cost feed combine with higher calf and cull cow prices, low interest rates on loans look very attractive. But despite the allure of low interest rates, agricultural lenders can be reticent to offer loan money to cow/calf operations.

There are some basic things you should do before heading to the bank. Below are three key recommendations from some experts in the ag financial world to make your loan seeking efforts that much more successful.

Have a general business plan

Jim Robb, Director of the Livestock Marketing Information Center (LMIC), suggested anyone thinking about a loan create a business plan if they don’t yet have one. Even at the most basic, having a business plan will signal to lenders that you have thought about your income and expense flow. If you don’t demonstrate knowledge of how and when a venture will be profitable, why should someone loan you money?

Documents out of the recent National Agricultural Banker’s Conference are rife with not just recommendations for agricultural bankers to require business plans from their potential loan recipients, but out of hand assumptions that such documents will be part of the process.

“In volatile markets, a highly leveraged borrower may not have the necessary cash flow to properly service the debt according to the loan terms. By reviewing the borrower-prepared cash flow statements, the bank should be able to identify potential repayment problems, calculate key cash flow ratios, and assess the ability of the business to handle risk.”

If lenders are expecting a business plan, make sure you have one ready before heading to the bank.

Estimate your costs, know your assets

Tying into the need for a business plan, Robb recommended producers realistically estimate their cost of production. Cow carrying cost is a major part of the cost of production equation, though this can be a hard thing to estimate, given the uniqueness of each operation, among other things.

Many Cooperative Extension programs have cow carrying cost estimators that can help. One such estimation tool can be found at decision.htm, titled “What can you afford to pay for a cow?” According to Extension documents, feed costs can make up anywhere from 25- 60 percent of cow carrying costs. As such, Jeff Tranel, Agricultural and Business Management Economist with the Colorado State University Extension, recommended producers get to know their feed sources.

“What is their feed supply, both supplemental feed such as hay, and what is their best guess on grass availability?” he asked, pointing out that if producers don’t expect to have access to good grass, they will be accruing more cost in the form of purchased feed.

Robb also recommended that cow/calf producers do a “critical assessment” of their net worth and total assets. Lenders will need to know it, so you should know it first.

“You have to sort of preempt the banker so you know what your balance sheets look like,” he said.

Know your three Cs of credit

The three Cs of credit are Character, Capital, and Capacity. Collectively, these are what lenders look at when deciding to grant a loan. Since a prospective lender will be judging you on these three areas, it is valuable to know them before you go.

Character refers to your history, or more pointedly, your credit. Do you have a history of paying bills on time? Are you reliable and constant in your life, such as consistency about your job and where you live.

Capital is what it sounds like; what are your assets that might be called to bear in case your usual income is no longer available to pay your debt. This can include real estate, personal property, savings and investments.

Equity and liquidity are also considerations. This underscores the need to know your assets, as mentioned in the prior section.

Capacity refers to your capacity to repay the loan. This is where the aforementioned business plan, as well as past records or documentation of like operations, become so necessary. If you have no or little hope of being able to repay a loan, why would a lender bother with the risk of lending?

Though not part of the three core tips he and others recommended, Robb suggested producers consider stress-testing their operations.

“The banks are being increasingly pushed to stresstest their portfolios,” he said.

“So I think producers down the road will need to think about doing a bit of stress testing. That’s a new avenue that will become more mainstream.” — Kerry Halladay, WLJ Editor