Getting Credit

AG BM 460

Introduction

• Agriculture and others in the Food System need credit

• Hard for banks to provide enough – too risky

• Sources of credit

• What banker is looking for

• What should borrower expect

• Business & Marketing Plans

Holders of Ag Debt 2001

• Commercial banks (40.8 percent)

• Farm Credit System (28.2 percent)

• Individuals and other, including suppliers (21 percent)

• Life insurance companies (6.2 percent)

• USDA's Farm Service Agency (3.8 percent).

Sources of agricultural credit

• Commercial banks 32% of real estate – 51 % non real estate debt

• Farm credit

• Life insurance companies – 13% of farm real estate debt

• Suppliers

• Family sources

Farm Credit

• Network of federally chartered, borrower-owned cooperatives specializing in agricultural loans.

• Created in 1916 to provide long-term fixed-rate mortgage loans to farmers

• A major source of agricultural credit and a major competitor in agricultural credit markets.

• Some federal guarantees of loans

Five Keys to Credit

• Conditions

• Character

• Capital

• Capacity

• Collateral

Conditions

• Size & viability of operation

• Type of operation

• Specialization

• Industry conditions

Character

• Management ability– Production– Financial

• Honesty and integrity

• Repayment performance

• Legal structure

Capital

• Working capital (current assets – current liabilities) must be positive

• Current ratio (current assets/current liabilities) should be > 1.5

• Equity ratio (net worth/total assets) should be > 0.5

Capacity

• Operating expense ratio

• Earnings before interest, taxes, depreciation, and living expenses

• Production capacity

• Provide a balance for trouble

• Secondary repayment capacity

• Coverage ratio ((EBIT-LE)/debt service)

Collateral

• Protect the lender

• Provide control of repayment source

• How easily can collateral be sold

• Stability of the value of collateral

• Durability of the collateral

What a lender expects from you

• accurate balance sheets and income statements each year

• a cash flow budget a year in advance and review it with your lender

• a good set of business records

• a businesslike manner with a positive attitude

What a lender expects from you (cont)

• Arrange for credit in advance of making any major purchase

• Give your lender time to review your plans and make suggestions

• Maintain good communications with your lender

• Avoid split lines of credit if possible

What a lender expects from you (cont)

• Do everything possible to build confidence, understanding and trust between you and your lender

• Set long-range goals for your business and your family

• A Business Plan

• A Marketing plan if you are selling something special

What you should expect from a agricultural lender

• A commitment to agriculture and to serving customers at all times

• a good knowledge of agriculture

• a willingness to make periodic visits to your farm or ranch

• To be an expert on agricultural financial management

What you should expect from a lender (cont)

• To be cooperative and sincere

• To honor commitments

• To provide prompt action on credit requests

• To explain in detail reasons for not approving a request for credit

• keep all matters totally confidential

What you should expect from a lender (cont)

• To explain all services the institution can provide and show how he or she can help if your credit requirements change in the future

Tips on Preparing and Presenting a Loan Request

• Be prepared for questions

• Be precise about your loan request– How much?– What for?– How will I repay?– What is collateral?

Tips on Preparing and Presenting a Loan Request (cont)

• Provide back-up details

• Outline your payback plan

• Be forthright

• Be prepared to sign… and sign

• Be a long-term thinker

Business Plans

• Description of business

• Market

• Competition

• Location of business

• Management

• Personnel

• What money do you need and why

Business Plans (cont)

• Financial data• Supporting documents• Resumes• Personal financial requirements• Credit reports• Copies of leases• Contracts• Anything else relevant

Marketing Plan• Market Summary

• Product Description – what makes it special?

• Competition

• Product Positioning

• Communication Strategies

• Launch Strategies

Market Plan (cont)

• Public Relations• Advertising• Other Promotion• Pricing• Distribution• Vertical Markets/Segments • International• Measuring Success• Schedule

College Pizza

• Suppose you wanted to buy College Pizza

• A competitor of Canyon

• Worse location

• Roughly comparable

• You have experience in managing a pizza parlor

• You have $50,000 that your father has kicked in

• You need to borrow $150,000

• What do you need to do?

Concluding Comments

• Credit can not be assumed

• You have to earn it

• Business Banking is not an impersonal relationship