Ag Loan Eligibility Boils Down to the Basics

Writer: Tim W. McAlavy, (806) 746-6101, email: t-mcalavy@tamu.edu

LUBBOCK – Farmers seeking operating loans for the 2002 crop year should focus on the basics when they visit their lenders, according to K.W. Hill, an agriculture loan officer with City Bank in Levelland, Texas.

“Things are going to be pretty tight this year. We don’t have a farm bill in place. We don’t know when we will have a farm bill in place, and commodity prices are less than encouraging,” Hill said. “As a result, lenders will be looking very closely at what I call the five C’s for each and every loan and client.”

Hill was a featured speaker at the Jan. 16 West Plains Ag Conference in Hockley County -- one of seven regional South Plains ag conferences sponsored in January and February by Texas Cooperative Extension.

“The five C’s are: Character, Cash Flow, Capital, Credit Rating, and Capacity (management ability). In my 18 years experience in ag lending, these are the factors that count the most in loan eligibility,” Hill said. “Your character and capacity may already be known if you are a repeat customer with your lender. If not, how you have conducted business in the past and the success of those enterprises provides a good indication of both.

“In addition, there is a loan eligibility checklist that you should keep in mind. A list of important information your lender will need to evaluate your standing under the other three C’s.”

Hill said the checklist includes these items:

• a financial statement showing assets, debt and net worth
• a budget statement of expected expenses for each enterprise
• a proposed operating plan, with details on acreage, crops, livestock, inputs, etc.
• a five-year, farm-and-crop yield history
• last year’s income/expense statement for the operation
• a copy of the producer’s tax returns for the past three to five years
• a debt/collateral statement for the operation
• a list of equipment that will be used, and proof of insurance on larger equipment
• a real estate description of the farm
• an overview of the producer’s marketing plan
• crop insurance statements from recent years
• and a projected schedule of farm program payments pertinent to each enterprise

“In generating a financial statement, it’s important to remember that production investments, inventory, dividends and rebates should be listed as assets,” Hill said. “Loan committees put a lot of weight on net worth, but we realize that net worth fluctuates and is highly variable in light of low commodity prices during the past few years.”

All of the items on the checklist are basic ingredients for generating a projected cash flow statement. Farm program payments can often mean the difference between a positive and negative cash flow, he added.

“We can help you generate a schedule of projected farm program payments, once Congress puts a solid farm bill on the table,” Hill said. “But the real bottom line is a cash flow projection of more than 100 percent. I use a bottom line of 110 percent, but other lenders may require more.

“If your cash flow percentage doesn’t measure up, there are probably some options your lender will want you to consider. Are there any ways to cut operating expenses? Can you extend or restructure an existing loan? Should a Farm Service Agency guaranteed loan be part of your overall loan package? Can you refinance an existing loan at a lower interest rate? These are options that can affect or possibly improve your cash flow and loan eligibility.”

Producers who follow the loan eligibility checklist and generate a flexible operating plan are likely to fare well with ag lenders, he added.

“Preparation before you visit your lender, and building a flexible operating plan could be the key to hitting the right cash flow percentage,” Hill concluded. “Above all, remember that cash flow in any operating plan is all important – whether you’re planning to operate in a ‘cut-back’ mode, or in a ‘go-all-out’ mode.”