How Can Loans Help Your Farm Business Grow?
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EmailFebruary 26, 2025
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What benefits do loans really provide my farm business? How do I begin preparing to apply for a loan? What is a lender looking for when they review my loan request? Learn the answers to these questions and more in this session on understanding how loans can help your farm business grow.
The 2025 MI Ag Ideas to Grow With conference was held virtually, February 24 - March 7, 2024. This two-week program encompassed many aspects of the agricultural industry and offered a full array of educational sessions for farmers and homeowners interested in food production and other agricultural endeavors. More information can be found at: https://www.canr.msu.edu/miagideas/
Video Transcript
Welcome, everybody. Welcome, Jon. We're going to get started here, our beginning farmer track for the day. Right before Jon gets ready to present, I just want to thank everybody for being here and also to give a quick shout out again to our sponsor, AgriStrategies, LLC. We will present their information at the end. Again. As always, we appreciate your support. And with that, I'm going to turn it over to Jon. Thank you all for joining today as we talk about how loans can help your business grow. What we're going to start off talking about starting out really is really briefly some ideas around that in general. But then as you think through the lending process, how you're going to be able to utilize that process to help you think more about your business and the direction that you want that business to go into the future. One question I had from folks before we got to today was whether or not we'd have information on sources of funding, specifically, what are some of the options out there. So I wanted to highlight that just briefly, the fact that there are a number of funding sources that are out there. USDA Farm Service Agency is one example. There are a number of different loan programs that are out there depending on if you're looking for operating, if you're looking to buy farmland, There are some cases where they have what they call facility loans to help you put up actual like storage facilities and possibly even some emergency loans or even to help you with land contracts. There are just a number of programs that they offer. But then there are also other sources beyond what USDA offers in kind of what we call the private funding sources, and those can be your commercial lenders. For example, a very well known one in the community is Greenstone Farm Credit Services. There are others, maybe a Rabo AgriFinance, for example, you have some of your general banks or credit unions. I know union bank and Chemical Bank and some of those other ones do ag loans as well, or at least they have in the past. There are also areas of crowdfunding, startup accelerator financing, and then even other competitive loans and grants that are out there. A couple of links here on the screen are some different places that you can get access to that information. One is USDA Farm Service Agency. The other is resource for Michigan State University Center for Regional Food Systems that puts out funding sources for food related businesses and has a whole host of resources you can look into for financing. So as we start to think about how loans can actually help your business grow, there's really three areas that we want to think about initially about why we might be wanting to go get a loan in the first place. And first off, a lot of cases we get a loan because we're trying to free up our cash. We don't want to invest the cash we have because then that limits us on other things that we want to be able to do with the business. So a lot of cases, that's why people go out to get loans, is that they want to keep the cash they have. Or maybe in some cases, it's a matter of we don't readily have the cash available. We could get the cash, but it's a lot easier on our operation to go ask for financing. In other cases, we might be looking to invest in business growth, looking to expand the operation some ways, or in some cases, we're using the financing to help manage some of the risks that we experience. Let's dive into those a little bit more in detail to think about what each of these mean. As we talk about freeing up cash, it can be covering operating expenses, the day to day things that we want to pay for, we want to make sure we've got enough money to get through the production year and to get it from start to finish. In some cases, it might be we're needing money to be able to make improvements or repairs. There are a lot of cases where folks are if you bought up a place or maybe you bought some machinery that you're trying to refurbish, some buildings you're trying to repair or improve upon. Those are type of examples where a loan makes sense to help free up your cash that you can actually go ahead and get those done without depleting what you have in your reserve. In other cases, you might use that money to help you expand and think about marketing campaigns and advertising. Again, we're thinking about money that we want to be able to utilize to help advertise and get our recognition of our business out. We want to be able to really promote ourselves to our clientele and potential clientele, and so that becomes a way to free up cash just to get a loan to help us with those kind of activities. In other cases, it might be purchasing supplies, something that we may not think a lot about initially that is going to be a real huge expense. But as you get to looking at how much you might have to invest, especially if you're working in specialty type crops where you're working in various different markets where packaging becomes a significant concern and you spend a significant amount of money on packaging, loan specifically for those purposes make a lot of sense to invest into versus using the cash you have on hand. We think about investing in growth in the business. Some examples of that can be you're trying to buy more land and you want to be able to expand the operation in terms of its size and its production capability. Maybe you need the land to put up buildings that you're looking for either for storage or processing, maybe even looking at the potential of a creating some store or storefront, at least on the farm operation, and you need some additional space to do that, buying land makes a lot of sense. You could be building infrastructure, like the example here of we've got a greenhouse or a hoop house that maybe you're looking to actually expand the operation in some way in terms of your production practices, and you need that infrastructure investment, and that's where a loan can be very helpful. In terms of our livestock folks, it might be a case of you're trying to increase your herd size and financing is a great way to do that, free up some money that you can use to actually start to make that investment and grow your overall herd. In some cases, it might be where you're looking to invest in purchasing better equipment. A lot of cases farmers, I know many that will use used equipment that may be a little bit older and we talked before about freeing up cash for repairs for improvements. Eventually, that does wear out, and so you have to replace that. And so you look at opportunities to replace some of that capital and invest in new equipment. Maybe it's newer technology that you want to be able to take hold of. Loans are a great way to help you invest in those type of things that help grow the overall size and scope of the business. Now managing risks is something that doesn't often get thought about when you think about how can loans really help our business? Really, as we think about risks, in some cases, it might be tagging onto the first two areas we talked about where we're trying to free up cash and by doing that, we're helping to build our cash reserves. We're trying to safeguard the money we already have, but then we're also using that funding from a lending source to help us maintain and build even those reserves so that if we need to weather some things in a tough economical year, we have the ability some extra cash maybe to fall into if markets are down or if we have some production issues because of weather. That's where building cash reserves can be a helpful use out of loans. Especially if you've had a natural disaster of some kind, which we've had some experience with that here the last couple of years in various places, maybe you're looking to rebuild and you're trying to mitigate the risk of not having whether it's an irrigation system, maybe it's a storage facility, those type of things that were maybe damaged in some way, you can use the loans to help you keep the operation going forward and not be as greatly impacted by that risk if you had to finance the rebuilding on your own. In some cases, there are just it's financially struggling when the farm economy isn't the greatest, and so you're looking at struggles of cash flow. And sometimes when things are a little bit tighter, you can look at opportunities to refinance older loans that not only resets your cash flow a little bit, but helps to free up cash because the idea is that refinancing is going to ease the debt payments to some degree and make things easier for you to continue to operate, especially when you've experienced some kind of financial hardship. And so loans can be really helpful from a number of different ways. The big key though, to really utilizing a loan is to think about the process you go through to obtain them. And I want to spend some time talking about the five Cs of credit. These are really important. These are the processes, the steps that you go through and what the lender goes through when they're looking at, do we want to invest in this business? Do you want to put money into an operation? For yourself, it's helpful to think through these because you're thinking about how you actually answer and address each one of these areas within the business itself. The first one I want to talk a little bit about is character. This is what your reputation or your track record is. And it's something we'll go spend a little bit of time on each one of these. But your character is one of the first things that is going to precede you before you even walk in the door. Once you got an appointment to go in and talk about a loan, one of the things that really starts to happen is people start to talk about, who is it coming in? Do we know them? Does the staff know them? And as we explore more into that, your reputation and your track record is a really important part of the overall lending process. There's also looking specifically at capital, and that's the ability for you to contribute to the investment that a loan would fund. We'll spend a little bit more time on that one in particular. There's also thinking about collateral, the ability to secure a loan, which actually ties into capital a little bit. There's also capacity, and this is where we start to talk about the ability to repay a loan and whether or not you can meet that financial obligation. Then lastly, we talk about conditions, which these are really the additional requirements that lenders will look to to actually approve or secure a loan. Now, with each one of these, we have to be thinking about how do we go about demonstrating each one successfully to a lender to get the loan, and this is where we start to begin the process of how we use these to help us think about our own business and the path we want to take it forward. So the five Cs of credit are really an indicator of how you make farm decisions. And everything comes back to decision making when it comes to a farm business. I like to always think about decisions as being this three stooled approach or three legs of a stool approach where you have these different areas of production, business, and finance. And with the business being in the middle, it's the overarching goal of what you want to do with this operation. What are its core values? What is it trying to achieve, its goals? And then the financial aspect connects in terms of thinking about things from a profitability standpoint, but how do you financially grow the business, reach the points you want to in those goals, which then ties back into production, which is where everything really starts in terms of what it is you're going to actually produce and have to sell and eventually make the money that you think about in financing. I should point out financing is where you would start to think about your markets. So there's this interconnectivity between the overarching idea of the business, where you're going to go about and think about generating the income you need to grow the business and be successful, and then those production areas that you're actually going to start out into that really start as the defining area of what your business is. Demonstrating the five Cs of credit starts with farm records. I wouldn't be a good farm business educator if I didn't at least mention farm records at least once in this. But this really sets the tone and illustrates your skill set as a farm manager before you even started the conversation with a lender and thought about the use of the loan. Because if you have organized really good up to date reconciled records that you get everything matching up in terms of what your bank statements are compared to what you have in your actual farm books, that's an indication of good management. If things are really unorganized, you've got some missing details, some incomplete information in there, that's going to be an indicator of poor management. And your farm records are really a good place for you to start to think about, what am I showcasing? What are my skill sets in the manager? Am I telling the right story that I want people to understand, am I keeping the details I need to enable to relay what we're doing here in the business? The question I often get with that is, how do we go about really trying to figure out how to actually understand whether or not we have good records. The best way to start with that is to actually go review them. Focus on a specific area of your farm operation, something that you think about that you work with quite a bit, that you're wanting to know the answer yourself, something that you want to be able to track. And think about that in the context of the conversation you have with a lender and what questions they might ask you about that area. And then go see if you can find the answers to the questions or find the details that you're looking for pretty reasonably, easily without a lot of difficulty. You're not spending hours digging through records and notes and receipts to find it. If you can, that's a really good indication that your records are pretty well organized. I want to give you an example of that here as we move on to the next slide. But I want to highlight kind of this picture I have here of a shoe box full of receipts and we've all heard about the shoe box. I think this is the time honored example of what people have for records. You hear the stories about people bringing in the shoe boxes. I can tell you when I used to be a lender before my extension days that I actually had that happen to me. I had asked a person to bring in their farm records and so that we could go through them. It was a case of where I left on, we had the conversation on the weekend. I had taken off a day early, come back on Monday or excuse me, Tuesday, and my my staff is chuckling because I I hadn't gotten to my office yet. And they said, oh, so and so brought their records. And when I walked in the door, I found shoe box after shoe box literally stacked probably four or five high all the way covering my desk. I had a little side table at the time that I used for keeping track of things. That had shoe boxes on it and it just absolutely covered everything. So needless to say, we had a conversation about organization and coming up with a different system. And the moral of the story there is that when I asked that simple question them we were trying to understand their cash flow situation and where the money was going. If you can picture these piles of high shoe boxes of records, answering that question of just what the expenses were and the flow of money in terms of where the money was being spent, a little difficult to answer. And so we end up spending a lot of time talking about different systems to try to reduce the size of the shoe boxes and those type of things. Um, and a good example of trying to figure out money is you think about things that we inherently want to know ourselves and why the shoe box example would be really tough to answer this question. Say that a lender wants to know about your production, your prices, and the revenue that you had for growing certain crops, and we're going to say that in this example, we're talking about raising watermelons and sweet corn, just to make this a little simplified. Well, as I've mentioned, with well organized records, you're going to be able to answer that information. You can tell how much was sold, what was received in terms of price, and even when those sales occurred, you can tell when the money came in. In doing so, you can demonstrate your decision making skill set because you're looking at what the average price is that the farm received. And so you think about the business goals, what the farm wants to be able to generate in terms of income, how it operates. You think about total revenues, overall financial position of what it brings in, and then also what products were raised, that touches on the production area. We think back to the three legs of that stool of farm decision making. And what you can do is you can pull out this kind of information where we see a this case of we have the different types of crops. We know when the sales occurred, how much had been harvested and sold in terms of the different units that we were tracking. And then we also know what price we were receiving, as well as the total of what we were receiving for each one of those crops at each sale. And as you track over time, you can start to tell a lot of information about how did sales from one end of the month compare to another end of the month? How did sale, was it different for one crop versus another? Is there some seasonality that comes out of that information? But more importantly, you've got all this detail that you've tracked, and you can provide these nice summary pieces of information that the lender would really enjoy to have. And you have, in terms of the Sweet corn, what your total production was, the average price received, and then the total revenue that was generated for the year. Watermelon, same thing, total production, the units sold, average price, and then what the total revenue was. It's all because you've kept these details and these can be little piece of information that you jot down like a notebook, things that you could write on an actual receipt or an invoice that allows you to then be able to enter that into your farm records and be able to track that information and tell you and give you some really good information to use when you're having those conversations, but also for you to evaluate how is our farm doing as we're looking and thinking about what our farm records can illustrate for us. We talked about demonstrating the five Cs and I mentioned coming back to talk about each one a little bit more in particular. I wanted to spend a little bit of time on character because when you start to think about how character comes up in a lending conversation, you really want to start asking yourself, what is my reputation? It's not necessarily as straightforward as you might think because there's a lot of different ways that you have a reputation as a business and even as an individual. What is your reputation as a borrower? This is where you think about your credit history. What's your loan repayment been like? That's an obvious one that lenders are going to look at. But that's not where the story ends when it comes to character. There's also looking at what is your reputation in the community? Do others that deal with you have something favorable to say? What do other farmers in the community think about your business? Biggest thing is that we all know in the farming community, especially, a lot of things travel by word of mouth. And people that have a good reputation in the community, often that comes out pretty easily. It's not a bad thing if nobody has anything necessarily good to say as long as there's not necessarily anything bad. But people want to know what is your reputation with other people that you do business with, and that is something that ultimately comes up that you yourself want to think about as something that maybe could be a strength that you want to make sure you're highlighting and thinking about in terms of something that the business does well and that you as a manager do well. And ultimately, that is where your reputation and your character really comes down to is what are you like as a manager of a farm business? Because that's ultimately what the character of these five C's of credit is really looking at. How do you answer this one? Well, that's where we get into talking about farm management experience. If you're looking at USDA type loans, especially, they specifically call out farm management experience as an eligibility criteria. Other lenders may or may not call that out specifically, but they still look for it. They just maybe don't categorize it the same way. Really what this is talking about, have you shown a history of being able to make decisions that directly affects the business success? Hopefully not failure in certain areas that it's been working into. We also want to think about farm management experience as being willing to learn and challenge what you know and don't know about running a farm business. There are always new things to learn. There are always changes, changes like the one constant universe that we always run into, and especially in farming, things change. No two years are the same, no two crops or marketing experiences are the same. How is your ability to learn and challenge what you know and pursue those things that you can recognize that you don't know? This is what's often referred to as decision making and this is what you'll probably hear referred to as you go to somebody outside of the USDA umbrella. It's really important because you're trying to distinguish the difference between a manager and really an employee because there are a lot of people that have been on farms. They had that employee mindset employee task oriented where somebody has told them, go do XYZ, and maybe they have a little bit of freedom to make some kind of decisions. It's the parameter of, well, have those decisions directly impacted the success or potential failure of that business, the outcome of what the business is trying to do. And that's where the transition from employee to manager is really difficult is being able to categorize and understand, where have I made those decisions? For people starting out, it's usually a lot easier to highlight that because other cases you're by yourself. So you've made all those decisions. But that's the distinction that they're looking for in a lot of cases is how have you actually done something that a decision you've undertaken that directly impacts the business and from a large standpoint, maybe it's what you're growing, maybe it's how you go about growing it. What markets you're involved in and what the thought process was that went into each one of those decisions is really what they want to start to understand from a management experience. It's something for you that you want to be able to internalize and think about how am I approaching the management of my business and what are some things that I can look at to improve or to change or to address to continue to make the business grow and be even more successful. Now here's an example I wanted to share where I'm going to use this from a crop perspective you've had several years of low yields, and so you decide as the manager, you're going to conduct a soil test. We don't think much of this, but this is a very important management decision. And so you test the soil, shows that the pH is out of balance, and you've got some nutrient deficiency going on. So your solution is you develop a nutrient management plan, you apply some lime, you rebalance those soil pH levels, and you get things back in shape. And this is a great example of a management decision because with that difference between the employee and the manager, the employee is not going to be the one to decide to go have a soil test done. They might have to be the one that does the soil testing or if it's not hired out, But then you have to do is you as the manager are making the decision to reorient that nutrient management plan, deciding what you're going to do, how much limes is applied, any extra fertility that you're going to add to the soil. The great thing about these cases that they're everyday situations that farms run into, and they provide great opportunities to add to your records and demonstrate how this was done. Because you can have the actual soil test maps that show what the deficiencies were, where the areas were. So you have that soil test results. You have the invoice that may be and I apologize, these are a little smaller on the screen than I thought they'd be, but you have the invoice that showcases what the actual products were that you purchased, what it was that you created for the plan. And then depending on how your application actually goes, you may have especially you're using GPS and variable rate technologies that are available, you're going to have an as applied map to show what you actually did, and this is where you actually can be able to answer the question of, well, what all these show and think about demonstrating your character, because you've identified a problem, you investigated the root cause of that problem, and then you've got all these nice records that show that you made a proactive decision in terms of how to resolve it. Again, this is an everyday scenario that farmers run into, but it's these examples that are great example of where your management and farm management experience comes out. I've done a lot of talking here, and so I want to move into a segment where we do a little bit of fact and fiction and do a little bit of interaction here. So in the chat, I've got a question here, and I want you to answer whether or not you think this is fact or fiction. And the question is that I must manage a large farm to be successful. A lot of guesses for fiction coming in, Jon. Okay. And a comment that success is relative to your goals. That would be very correct. All right. And the guesses would be correct because this is very much fiction. Successfully managing a farm is not dependent on the size and scope of the operation. I will grant that large farms may gain a lot of public attention. They get a lot of notoriety because they're large farms. But especially in Michigan, we have quite a bit of small farms that are very successful and really thriving throughout the state. The key thing that I want to highlight for people as you're looking at your business is finding that market that you can operate in efficiently and profitably to meet your goals, which is what aligns with the comment in the chat there, that yes, success is relative to your goals and being able to find that area, you can be successful and achieve those is more important than the size or scope. Okay. Let's do one more. An IRS Schedule F is needed to prove my management experience. What does everyone think? Again, seeing lots of no's, fiction, no. Okay. Everyone seems to be in agreement on that, which is good because that is fiction. Now, I will grant you that a Schedule F is very important to the lending process. Lenders will always ask for that because of the fact that it provides a glimpse into your profitability. A lot of cases, lenders will look at a Schedule F to help figure out, does the farm generate money? Is there a potential for repayment? We'll talk about more about repayment here in a moment. But it does not really give you a whole lot of detail about your management abilities. It can be additional information. It's good records, it's good information that you want to be able to share anyway because it does tell some of the story about the operation. But it's not going to replace your farm records. It's not going to replace your ability to communicate your own knowledge and your own understanding, and it's certainly not going to replace your ability to express your passion for farming. It's just very limited in terms of the area of showing your character and your ability as a decision maker. So let's talk about other types of records here. Let's move into one of the next C's and let's talk about capital. So with capital, lenders want to see that you can offer something towards the loan, whether that's a down payment, that you've got some working capital reserve, that you can maybe have something to fall back on if you need to make the payment down the road, or collateral, which we'll talk more about that in a moment. But the other thing that people, especially lenders want to see when they talk about capital, is they want to start to gain a better understanding of where the farms financial health is at. In a lot of cases, this is where we start to talk about financial statements because they showcase the farms really their health status. And it's important for the farm to be able to understand where the farm is from a financial health standpoint because as they think about what you're going to be able to contribute towards that loan investment. This is something I find that people don't often think about is that when you go for a loan, you're not off the hook for still having to contribute something to what you're asking for the loan for because lenders seldom provide all the funds you need. With some exceptions. If you're looking to use that money to help with production and inputs, as we talked about before, we're thinking about freeing up cash was something that was a good use of a loan. Well, you're not going to be able to free up every dollar by getting a loan because when it comes to production and inputs, an industry standard is around 75% of what your operating needs are is about what most lenders are going to be comfortable with. Some will go beyond that. But generally, they want to make sure that you're investing something of yourself and making sure the operating inputs and production costs are being covered. Real estates, there are a lot of cases you're being asked to provide something towards the purchase of real estate and that can range 80-90% of the funds to buy that property. There are some programs that are out there that actually work with you to get around having to provide a down payment. USDA, I'll plug them for a program I know they have that looks at that as an opportunity to reduce or limit the down payment. Some of your commercial lenders have those too. And that's the thing that you want to look for is where those programs are and what investment you're going to have to make in terms of that down payment. Now, the exception that happens out there is when you think about equipment and livestock, um, I often joke with people that when you think about buying things holistically, it's hard to split up a tractor, it's hard to cut up a cow or a pig or a chicken or things like that. But really what they're looking at is it's something like equipment and livestock. They're willing to help invest the totality of that because the expectation is you're going to be providing funding elsewhere in terms of maybe the production inputs, the feed, the repairs, those type of things. And so there are some trade offs that you might see there. The end result though is that borrowers are often have to meet the rest of the farms need outside of the funds that they're being provided in the actual loan and at the same time show that they can repay the loan itself. This is where those financial statements come together and this may look like a little bit of a convoluted mess here. But I want to highlight how the financial statements are really part of telling the story about the farms financial health. And what we have described here is we have the beginning of year balance sheet, an income statement and the balance sheet for the end of the year. And we start in the middle because when we look at financial statements, what you're trying to get to is your beginning of the year balance sheet, which technically would be last year's ending balance sheet, It talks about how did we start here and through our income statement, our cash transactions throughout the year in most cases for farms. What happened that got us to the end of the year balance sheet? We think about where we started, the progression of where the year went, and then where did we end up when things were all finished out. Now in the midst of this, there are these other little statements that float out to the side. Cash flow statement helps to think about the money that came into the operation and where the money went out to and we'll revisit the cash flow statement a little bit later on. But then there's also this owner's equity statement which talks about the overall growth of the business. You see these multiple parts and you see where there's areas where all these intersect and there's little pieces of information that are pulled out. A cash flow statement pulls information from the balance sheet, and the income statement to be able to tell the story of that money coming in, the money going out, and then the owner's equity does the same thing to talk about the overall growth of the business from start to finish in the year. But you think of these multiple pieces. There's all these different things of information which might seem like a lot to try to take in all at once. What takes time to get comfortable with that a good comparison as you think about a soil test and all the different parts that go into talking about a soil test. But all these financial documents are different sections of the financial test, the financial health story, where you think about the different sections, the CECs, the pH, the type of soil texture, all those pieces of information are individual parts of your soil health story. Well, you look at this the same way as what are these pieces of information telling us about collectively the financial health that the farm has. It takes time to get comfortable reading a soil test. It takes time getting comfortable reading the financial statements. But these are examples that you want to be able to start to get comfortable with. These documents start to tell the story that you want to be able to understand yourself before you get into working with the lender. Now let's go to another little fact or fiction moment here. So let's talk about a scenario of limited capital. I'm starting out with very little on the financial statements. The farm is financially healthy, but it doesn't have a whole lot to offer on capital. Even with reasonable repayment ability, the chances of getting a loan are pretty slim. Fact or fiction. I have a couple of responses. One person said this is a question they were going to ask. That's good. And then possible with USDA. Okay. This one I think stumping people a little bit more than the other ones. One guess for fiction, proven capacity will make it happen. I think Steve knows the answer to all these though, so I don't know if I if I should give Steve that much credit. But Steve is actually right. The answer is fiction. Lenders understand in most cases that it takes time to build that business and some businesses are going to need more time than others. The thing that really lenders want to work with is an operation that is going to be financially healthy. And has a reasonable potential for success. That's really important things that you have to be able to relay to the lender about the direction of your farm and where your understanding of this information really comes into play because you can still be considered to be doing really well regardless of what stage of development you're at and still have the possibility of getting a loan. Now, one of the comments in the chat about possible USDA, USDA has a lot of programs designed to help people getting started, especially on those early stages. But there are also commercial lenders that will work with people that are in that same position. Sometimes they have what's called guaranteed loans where they're backed by government funding. Some cases they're not. They have different tier systems or different ways of working. Not every lender is going to be an automatic yes when it comes to this question. But part of understanding this is being able to look and say, what do we have to offer? What is the reasonable expectation for the success of this operation going forward? That's the part of the conversation that you really want to be able to focus in on as you think about this specific scenario. This is a very real possibility that people can still get loans in this situation. I will grant it may take finding the right lender, but we'll talk a little bit more about how you can help narrow the gap that you may find in terms of being able to help secure the lending and bring the lender maybe a little bit more comfortable and ease if you're in this situation. But it's still very possible to get a loan in this situation. Now let's talk about collateral. This stems off of the capital idea from the stance that when you think about what you have to contribute. Collateral is technically tied to capital in that way because it's talking about a secondary source of assets outside of cash to really repay that loan. And there are different types of collateral, and those typically get matched up with the type of loan that you're asking for. If you're talking about an equipment or a loan for farm products, typically, they're going to want a lien on the actual product you're raising. And so there's some ways that they'll go about trying to secure the income from that to make sure you're going to be repaying. If you're buying equipment or livestock, it's going to be a lien on they're going to want collateral from that actual piece that you're buying and then other assets of similar type. Same with buildings and of course, real estate. The key thing to remember about collateral is that collateral has to exist throughout the loan repayment period. So you think about the years of service or that effective time that asset is going to be around. Well, if you're talking about an operating loan, you're going to have that production is going to actually generate money sometime in the next 12 to 18 months or less. And so that's why typically an operating loan for about a year they're looking to get they're going to match up that income source. Breeding livestock, typically, those loans are going to be a little bit longer, so you're going to see a little bit longer period that you expect those animals to be around. Ten years might be a little bit too long depending on your operation and what you're actually doing. Same thing with farm machinery. Usually, those loans tend to last somewhere 7-10 years because they expect you're going to have in most cases, or machinery is going to have a useful life of about five to ten years before you've got to do some kind of major improvement to it, whether it's an engine overhaul or those type of things that, you know, before the significant first repair has to be done, and then you're looking at the question of, do I repair or replace in some cases? Real estate, we don't expect it to go anywhere. So typically, those are why it's used on the longer term loans, especially when you think about buildings. Because buildings, typically, you're going to have that real estate is going to be tied in with the building because that's where the building is going to sit. Generally those longer term loans, typically, you're going to look for assets that are going to be around a lot longer. I made the comment or I used the term lien earlier and I want to explain that a lien is what lenders place on an asset. It is a legal claim on the asset that they're using as collateral. And so if you think about equipment or breeding livestock, they can place a lien on that equipment or those animals. And you can have assets that can with more than one lien from different banks. In this example here, we're talking about three different banks that have a lien on all the equipment in the breeding livestock. And, you know, you think about how different lenders can each have their own lien on an asset. You also can have a situation where the same lender can have multiple liens if they have different loans because we start to talk about this concept of lien position. And the lien position is. Here we go. The lien position is really important because you think about the number of liens and how many you've got tying up an asset because what you really want is to have fewer liens on an asset because that means you've got more available to protect an asset because you think about the amount of debt. If you have multiple liens on an asset, that means you have multiple debts that are trying to use it as a second source to repay the loan if you're short on cash and you don't want a lot of liens. You want to have as few liens as possible. This concept of lien position becomes really important because if you've ever seen the skit, the Abbott and Costello skit of who's on first. It's a really good skit because of the fact that this is really a great way to describe who's in what lien position. Lenders always want to be in first position. They always want to be in first place. They want first access to the assets and because if something goes wrong, they have less risk of not having that loan repaid. Subsequent liens means basically you're having to wait for whatever is left in a worst case scenario, which means more risk for people that are in the second, third or fourth position. And so you need to understand where your loans are at or where the liens are on your assets because when you go to talk to a lender, especially if you've got some existing loans and you're talking to a new lender, you have to think about how are our assets tied up with debt and what availability do we have to be able to make further investment in the farm if we are limited in terms of the available collateral that exists out there. That ties in a lot of cases to thinking about capacity. This is where we actually think about being able to repay the loan. It's that question of, can you repay the loan itself? You don't want to do it through collateral, you want to do it through cash you generate each year. This is where you start to think about a cash flow projection. You need to be able to talk about where's that money coming from, those income sources, where is the money going? Is it going to expenses? Is it going to debt? Then you have to also ask yourself when you're doing a cash flow projection, are those numbers reasonable and realistic? Because you want to make sure that they're based either on past success or a combination of past success and forecasting, If you don't have success, you want to be able to really look at those forecasts and make sure that what you're seeing out there in the future for potential is being reflected accurately in your projection. In a lot of cases you'll see something like this where it might be an income statement, a projected income statement that shows how much money that you're expecting to generate and then how much expense and then what that net income is going to be and how much you have left over to actually pay. And that's where you start to ask the question of, well, what is good repayment? What does that look like? And that's always the question that I ask people to think about this realistic and reasonable aspect of their projection because there's a couple of things that you want to be able to address in that projection as you're looking forward. When we talk about repayment, oftentimes people will focus only on profit. As an industry, our focus often stops in profit. Profit only really covers operating. What did it take? What did we bring in from income from the production we had? What were those expenses going out that we used to generate that production? But what we ignore is these other areas of investing, financing, and then any non farm expectations we have of that income from the farm. That's where this cash flow statement that we have here is really a useful thing to use in addition to a projection because you want to be able to think about, and this is good to think back as you're looking back if you've got good notes to go back to and look at where you've been in the recent past of where has the money flown? What has our repayment capacity been in the past, To look at some of these other areas beyond just the cash area. We think about the investing. Well, this is the capital asset portion where we go back to those financial statements are helping us to say, well, what did we sell any assets? Maybe we're replacing some things? Then what did we turn on and buy? Did we buy any new assets like new machinery? You think about financing, did we have new money that we brought in at the same time? Do we have money going out in terms of principal payments? You also want to think about non farm expectations and really thinking about the idea of, are we expecting to draw anything for family living? Do we have taxes that we're expecting to pay for this? Are we expecting any money to go back into savings, those type of things. And what we really want to be able to show because what a lender is going to want to look at is, is there positive repayment and farm growth as you think about the overall capacity of the farm to pay debt and to cover all its other expenses? Because at the end of the day, you're trying to answer this question of did the farm end the year better than it started? You look at where your cash balance was to start of the year to where the cash balance is to end of the year. Did that grow? Did the value of the business grow as we look at net worth? Did our working capital grow to where we have extra dollars to be able to use for next year, those type of things we think about? I know we're pushed here that we're at 11, so we got a little bit of late start. So if you bear with me here, we're just going to wrap up a couple of things. I do have a couple more of these to little scenario things or at least this last one here that have you guys go through, and then we'll kind of wrap up with our last little sections here. So in this scenario, we talk about capacity versus collateral. So we're talking repayment versus the secondary source of um really repaying the loan. We think about a case where someone's been in business for ten years and they have been struggling with consistent repayment capacity, but they have a lot of collateral. So if they go and talk to a lender, they expect and they should expect to still get a loan because they've got collateral even though repayment is a little bit inconsistent. That's fact or fiction? The Steve's voting for a fiction. The answer to this is that it should be fiction. We had some great questions in the chat about whether liens were involved, every character is involved. That actually is one of the struggles with this concept is in this scenario is that each lender is going to value those five Cs a little bit differently. They're going to rate certain ones higher than the others. But the end of the day, you still got to be able to demonstrate that you meet all five, especially the ability to repay that loan. Really gone are the days where widespread you're going to find people that are going to look at the balance sheet, lenders that are going to look at the balance sheet and say, you've got all this equity. Yeah, your repayment capacity is really suspect. We're going to go ahead and make you this loan. If you have a lender that is talking to you like that, I'm going to tell you right now, find a different lender. Because you want a lender that is looking at more than just solely that equity position and what you have in terms of liens and collateral to offer to them because that can significantly put your business at risk. What you want is a lender that's looking at all five of these C's and looking at what your repayment capacity is and having the conversation about how you actually can work to improve your capacity, repayment ability, knowing where you are in terms of the financial situation you're in, what your goals are on the farm, and how you've handled that conversation with the lender about the farm's financial health and its goals and direction. That you can create a plan that helps you address that concern about repayment capacity so that you can more securely meet that while not just solely relying on the fact that you've got all this collateral sitting out there. Repayment capacity still has to be met, have to be able to demonstrate that there's a reasonable chance of that coming through regardless of how much collateral you've got sitting there. But this one is a little bit tougher because there are still, occasionally I hear stories of lenders that will not look at repayment capacity if you've got a lot of collateral, and that's someone that's looking, I think, in the case of, they're not too worried if your business goes under because their loans going to be secure. But you want someone that's not looking at your business like that. You're wanting someone that's looking at the investment opportunity to be an invested partner with you going forward. Now, not to say that when you run into these situations that there's not going to be some concern and oftentimes, these are the situations that lead to talking about the conditions, the finally that comes into the loans. When there are potential risks, whether it's capacity, whether it's collateral, whether it's the capital end of things, lenders are going to look to offset the risks that exist by adding additional requirements to a loan approval. Now, what are those risks that are out there that they may be worried about beyond just C's, as we've mentioned? Well, when you think about what those risks exist on the farm, that's a lot of cases, what they're looking at is what those risks exist that could impact your ability to meet one of those five Cs. Those can be things like internal risks. We think about a case of the questionnaire, you look at this picture of, you've got somebody that's holding out money. The question is, Are you the person that's holding out the money? Are you the person that's got the money that's on the left side, or are you the person that's on the right side that's taken from that pile? And if you're on more of the left and a lot heavier on the left, that can be questions about things related to the prices you're receiving, the cost of the operation, so your markets, your production activities. There may be risks things there that they're worried about that maybe need to be addressed to come back to things like capacity and capital, those type of things. There can also be external risks. Mother Nature has been very unfair in a lot of ways, not favorable the last several years depending on which time of year it has been and a lot of different weather situations over the last couple of years to work through. Those are examples of external risks that they want to be able to think about. Really, what you think about the conditions that get placed on a loan, your risk as the farm operation, if you're asking a lender to invest in your business, well, that's now become their risk too because what happens to your farm happens to the ability to have that loan repaid. And so oftentimes those conditions are going to be outlined to think about how to mitigate some of those risks. From an internal standpoint, that's why you're going to see a lot of cases where they're going to ask for yearly financial statements. They may have yearly farm meetings where they come out to do like a collateral or security check or just to come out and visit the farm. When I worked at USDA, I had a colleague that worked in rural development that helped put up a building, and she had an annual visit. She'd go out every year to meet with the farm and kind of check out the observation or the operation, excuse me. And she always called it a security check. She'd walk into the packing building that she helped finance. She said, yep, building is still here, security checks done. How's the business doing? And the whole conversation would just be to touch base and see how things are going on the farm. And it can be as simple as that that they look at just to be able to kind of check in and see what's going on and what the status is. But there may be some external things they put in there that they want you to try to address, like maybe having some kind of proper livestock insurance, joint checks, payment assignments. Those are fairly common if you're talking about things like dairy or maybe selling grapes to places like Welch's where you've got delayed payments coming in. And so those may be examples that they kind of cover. As we wrap up things, I really have been trying to emphasize that the whole idea behind this lending process is helping you to think about your own business and part of the reason is because you want to be the person that's leading the lending conversation when you go to ask for and request a loan. You need to be the person that's actually leading the conversation at that point. Talking about and answering the question of where is the farms financial health at the moment? That's not something that you want them to have to pull out of the details. You want to be able to talk about that openly. In addition to what are your plans for the farms future? This is a conversation about how this loan is going to help your business and thinking about what the benefits going to be You also want to be able to address the challenges head on that you're going to face. What are the obstacles that exist? Are they currently being felt? Do you see them on the horizon and being able ultimately to discuss the plan, not so much get hung up on the problems, acknowledge that there's things there, but discuss the plan to moving forward for the business to address and mitigate or work around those things you see in the future. You don't want to wait for the lender to tell you what the farmers financial health is. That's where we get into. You've probably heard the phrase of the church revival type conversations or the Come to Jesus type meetings that are joked about in the lending world. You want to avoid those because what those are is really where the lenders are already losing faith in the business potential. If they have to look at the information and pull those details out, that's not a good footing for you to be on. You want to be able to openly talk about where the farm is, what it's working through. It's very common for farms to have areas that they're struggling in that they're working through, but it's being able to talk about what those are because as you do, you're treating the lender as a trusted partner who's going to be investing in the farm and how that investment is ultimately going to help you in the business to be successful. So the main thing to think about here is that loan approval isn't just about being able to show a visible evidence. It's also about equally investing your time to and dedication to reviewing and understanding your documents that you're going to send in, understanding your farm records, and You want to be able to talk about the farm. You have to have the ability to talk about what's going on because ultimately, people want to know about your passion for farming and why the loan is going to actually be of benefit because that gives them an opportunity to understand what success looks like to you. At the same time, you can also help them to understand how you've overcome adversity because we all know challenges exist in farming and they're going to continue to exist. How have you overcome those in the past? What is your plan to overcome those? Because quite simply, reading isn't the same as hearing it directly from you. You're the farm manager. This is your business, your passion, and there is nothing anybody can read on a piece of paper that is going to replace that. Which is why communicating your knowledge, your understanding, and passion is really the most critical part of obtaining a loan successfully, and where this process is really important for you to go through and think about where is the farm at this point? What are our goals, and how are we moving forward to reach those and how can this loan or this lender help us to reach that point and grow our business. My final parting thought here is to beware the business plan trap because I mentioned not reading a document. I'm not saying don't do a business plan because those are very helpful pieces of information. But a very common misconception about business plans is that they are created mainly and solely for the purpose of getting more financial loans or financial assistance. These things are written for you as them or the farm manager. They benefit the lender, but they're written for you. The main purpose is to really think about the the fact that this is a guide for your farm, and that you start to think about what are the available market opportunities that you have that you're involved in? How are you managing the business? How is it organized? How are you operating the farm? What are those production details about how you actually go about producing what you have in the farm? And then you think about some of these financial things that come into play and how that all interconnects to the overall success and growth of the farm. Business plan is also something that you want to be able to review and update regularly. I see some comments in the chat about the document I have shown there, the Building a Sustainable Business Guide from SARE. It is a wonderful document. There are a lot of great helpful worksheets in that to help you to actually think through some of these processes. Really great for something to review as you're getting ready to request a loan because it starts to help you think about where the business goals are and some of the direction that you're trying to take the business as you prepare for this conversation and try to continue growing forward the business. We also have some additional resources I wanted to share and these are through our demand series. The intent of the series is to help people that are new to management. They may be beginning farmers. They may just be new to the role of being a manager. They've been on the farm. They're not new farmers per se, but maybe there's something new to the management role. We've got a couple of documents here that you can access. There's a QR code here. And then take you to the website. We've got some things on a basic walk through on how to motivate your lender to say yes, but then more detail in terms of a farm management experience resource guide, and then some information on collateral, and then actually a document that we created modeled after a lot of the content in this presentation that goes a little bit more in depth into some of the five Cs of credit. Um And then I'm also available to take any question anybody has. Jon, there is a question on the chat. Are you aware of any loans or grants that could be used toward things like furthering education, training, marketing, legalizing operations like toward an LLC or also any farm related loans for veterans? In terms of specific loans or grants and some of those, I don't know of any specific names that come to mind. There are loan programs that are out there. If you're looking for things like education and training, there are sometimes grants that do come up to help with that. I'm drawing complete blank on any names on some of those, but they do pop up every so often. They are out there. In terms of veterans, I did want to highlight that there are a lot of the loan programs that are out there. The earlier in the presentation, I highlighted USDA has programs, and then also some of the commercial lenders and some of those other funding resources, that document funding sources for farm related businesses, there are a number of those programs that actually have a component where they look specifically to help support veterans. In fact, veterans can be an area of separate financing or funding that they set aside for some of those programs. So if you let them know that you're a veteran as you're applying. That sometimes helps in terms of the approval process because they have a different set of money set aside for veterans that come in. Still, I think, on a first come first serve basis. So I'm not sure how much of that funding source is or less, but there are a lot of those programs that do have those kind of caveats that you mentioned those as you're applying for the loan and for the grants, and then Mariel put in the chat that we do have a grant presentation coming up later this afternoon. And so there might be some information there here as part of this conference to help with that. And then Steve added in the chat that he thinks Greenstone still has a program that provides some help for training. Yeah, I believe they might now that you say that, Steve. There's a note from Chris in the chat too that a lot of the ag conferences offer scholarships. So that's an opportunity too for some of the educational opportunities. I want to say thank you to everybody that came out today. Definitely reach out, let me know if you have additional questions. If you would like a copy of these slides, just feel free to let me know. I'm more than happy to send you a copy of these, especially with the links to some of the resources in there as well.
