Get your ducks in a row for a loan application

As borrowing needs get larger, it's important to develop a solid, ongoing relationship with your lender. Meetings to discuss a new loan application will be much smoother if you are well prepared and have all the necessary financial information readily available.

“If you’re looking for millions of dollars of financing, you better be able to show them a pretty detailed business plan that would justify it,” says David James with James Farms in Winnipeg, Man. “It would have to include a fairly comprehensive budget showing your cost and returns, as well as information on your cash flow that will show how everything is going to come to fruition.”

It’s especially valuable to have that outside expertise if you’re developing a proposal for something that will entail borrowing a sizable amount.

“You can never have too much information on hand when you go in to meet with your lender,” says Ryan Clubb, a Relationship Manager with Farm Credit Canada in Wyoming, Ont. “We usually ask for three years of financials for the company or the individuals who are going to be on the loan, regardless of the loan size. Bring along an updated net worth statement, so we have a snapshot of where you’re at financially with your debts and assets.” He also recommends you be ready to explain any items in your financials that might appear unusual.

And just because someone is worth a couple of million dollars doesn’t mean they can take out a large loan, Clubb says. Many farmers have a lot of equity but not necessarily a lot of available cash. A producer should be prepared to show how they’ll manage the loan without putting a big strain on the operation.

That’s the benefit of a lender seeing a customer’s last three years of financials. It shows whether they are spenders or savers. Those who can demonstrate they’ve been paying down debt or investing in revenue-generating assets are in a better bargaining position.

Curb your enthusiasm

Clubb sometimes sees customers who are overly optimistic with income estimates while underestimating expenses. He says many could benefit from spending more time reviewing their financials.

“If they don’t fully know their numbers, they can’t identify where the risks are in their operation, so they aren’t prepared to mitigate them when they arise.”

Lending institutions are more comfortable with customers who can point out concerns in the operation right up front, Clubb says. It demonstrates they know what’s going on with their numbers. It’s more worrisome when the lender is the one bringing concerns to light, since it raises questions about the producer’s management skills.

“At the end of the day, I don’t think institutions are looking for any particular right or wrong answers,” says grain farmer David James. “They want to have confidence you’ve done your preparation and homework, so they have a sense that you know what you’re talking about. Our number one goal is to strengthen our balance sheet and have plans in place to mitigate risk. That way, if something happens tomorrow, our lenders know we have something in place to deal with it. This gives them more protection and peace of mind.”

Bring in outside expertise

James says producers shouldn’t hesitate to bring in a third party to help with financial planning. It’s especially valuable to have that outside expertise if you’re developing a proposal for something that will entail borrowing a sizable amount.

“We all have strengths and weaknesses,” James says. “When I sit across from a loans officer, I know I’m dealing with someone who looks at financing plans every day. It’s easy to feel a little inadequate. But if I’ve had an outside consultant help me prepare my financials and prepare my presentation, I feel I’ve placed myself on a more even footing.”

James says one of the best decisions he’s made at James Farms was to contract a reputable farm accounting firm to help in the development of a strategic plan. “It gave us a road map that lets us track our progress year after year,” he explains. “It proved to be invaluable when it came time to deal with a lending institution.”

With a strategy in hand, James knew where he wanted the operation to be in five years, and how each purchase would fit into his goals. He could clearly explain what they wanted to do and how their current borrowing fit into their long-term vision for the farm. 

Planning, preparation and a clear understanding of your financial situation could make all the difference on your next loan application.

Next steps

• Update your net worth statement and send it to your lender

• Before approaching a bank for financing, have a business plan

• Check out FCC Loan Essentials for more resources