Coaching Farmers Applying for · PDF file•Establish eligibility for WFRP crop insurance...
Transcript of Coaching Farmers Applying for · PDF file•Establish eligibility for WFRP crop insurance...
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Coaching Farmers
Applying for Credit
Gary Matteson, Farm Credit Council
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Are your clients
willing to be
exceptional?
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Defining success
Potential borrowers should be able to say:
• What they want their business to look like
• What they want their LIFE to look like
• That success is about more than financial gain.
• …BUT, know that profitability is a pre-requisite to
achieving other, non-financial goals.
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All Success Stories Share One
Thing:
• Regardless of overall
goals, all sustainable
businesses must have
enough net profit to
cover costs,
including owner draw
and capital investment.
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prepare clients for their future by
understanding other businesses
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Teach the future as being
an exercise in resilience
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• Nobody owes you anything. You have to prove
you are worthy of trust.
• What, how, or why you farm does not mean you
deserve any more assistance, resources, or
opportunities than any other farmer.
Scott Marlow, RAFI
Beginning Farmer Humility Lesson
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Planning to succeed
Your help is needed by many farmers…
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Being asked the right
questions leads to
appropriate goals (understanding mindset of a lender)
• How will the borrowed money be used to
make a profit that can repay the loan?
• How will the loan benefit the business?
• What happens if things go wrong?
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•The language of lenders
•Speaking in numbers
•Calculating contingencies
The advisor as translator:
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Three basic business skills:
1. Financial
2. Production
3. Marketing
A beginning farmer is lucky to have two of these skills.
Coach them where to get the skill they don’t have.
The advisor as coach:
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Management is key to
profitability
Production management
• What is unit cost?
• quality, cost, and quantity
Financial management
• Can I pay my bills?
• managerial accounting
Marketing management
• “Who will buy it?”
• Current sales volume and prices
• Potential customers
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The Advisor as
Zen Master:
• The big picture
• Dispassionate analysis
• Confidence in the face
of challenge
• Willingness to learn
Chart courtesy of Scott Marlow, RAFI
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The advisor as Mom:
“Keep good records, they’re good for you”
• Set measurable goals and evaluation standards
• Demonstrate management capacity
• Demonstrate planning capacity
• Establish eligibility for WFRP crop insurance
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…explaining your farm business idea in words and numbers
what a lender wants to hear…
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The 5-Line Income Statement
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This 5-Line
Income Statement
Becomes the basis
of this Cash Flow
Analysis
Spreadsheet
Showing Annual Business Results
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Cash Flow Budgeting
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Outsider’s perception of a lending operation
Goal: Show me how to get what I want
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What the lender is thinking
• Income sources (anticipated vs. assured)
• Probability of loss
• Collateral
• Risk mitigation (crop insurance, contracts)
• Other security (cosigner, guarantee, etc.)
• 5 C’s of Credit (Character, Capital, Capacity, Collateral, Conditions)
Goal: Single version of the truth
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What a lender wants to see
• Balance sheet Snapshot of business financial health
• Income statement Business income & expenses over time
• Cash Flow Budget Shows where money goes and when
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The Balance Sheet
Net worth
Assets (what you own or control)
Cash, inventory, money that
customers owe you (A/R), real estate, prepaid expenses,
machinery
Liabilities (what you owe)
Loans, A/P, capital leases,
accrued expenses
- =
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The Income Statement
Income Revenues &
sales
Expenses Supplies,
feed, payroll, overhead
Net income - =
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How a Farm Lender Hears You: The 5 “C’s” of Credit
Character
Capacity
Collateral Capital
Conditions
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Character
■ Credit Score (should be 700+)
■ Demonstrates performance on
past loans
■ Indicates existing debt
■ Know what is on your report
■ Share and explain any problems
that exist.
■ www.AnnualCreditReport.com
Character
Capacity
Collateral Capital
Conditions
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Capacity to Repay ■ How will you repay the loan?
■ What are your earnings today?
■ What will they be after the investment?
■ History is important:
■ Income statements
■ Cash flow statements
■ Tax returns
■ Projections & Budgets
■ What if things don’t go as planned?
■ Off-farm income may be important
Character
Capacity
Collateral Capital
Conditions
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The Lender’s Fall Back Position
■ Real estate is best
■ Livestock
■ Machinery/Equipment
■ Inventory
■ What is it really worth?
■ Fair market value (FMV)
■ Net recovery value (NRV)
■ What will it get at auction?
Character
Capacity
Collateral Capital
Conditions
Collateral
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Capital
Do you have skin in the game?
■ Net Worth – or Debt-to-Asset
Ratio
■ How much do you own net of
debt?
■ Market value vs. Book value
■ Balance Sheet
Character
Capacity
Collateral Capital
Conditions
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Conditions – “The Deal”
■ Terms of the loan:
■ Real Estate 10-30 years
■ Machinery/Equipment 3-7
years
■ Livestock 1-3 years
■ Inventory – less than 1
year
■ Loan term should be equal to or
shorter than the life of the asset
financed
Character
Capacity
Collateral Capital
Conditions
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How do lenders
arrive at a decision?
Character
• The Individual
• Who are we lending to?
Capacity
• Repayment Ability
• Where is the business going?
Capital
• Financial Position & Financial Progress
• Where does the operation stand today?
• How did it get there?
Collateral & Conditions
• Basis of approval
• How much risk is involved?
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Poor records
High existing debt
Low credit scores
Relying too much on collateral – not enough earnings
Low personal investment
Unrealistic expectations
No “plan-B”, i.e. What if?...
Prices fall
The weather doesn’t cooperate
A buyer goes away
“Build it and they will come” business plans
Lack of cooperation & commitment when times get tough – We’re in it for keeps! You need to be too!
Lender “turn-offs”
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What’s the dream farm?
and where does the money to make it happen come from?
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Equity Financing- Investment
Start-up or venture capital
Often high cost
(ownership)
High risk of failure
Usually comes from self,
relatives, angel investor.
Debt Financing –
Loans
Finance ongoing
operations or expansion
Does not dilute ownership
– cost is limited to interest
Banks live here
NOTE: Traditional lenders like Farm Credit and Banks are not really in the
business of financing start-ups. They primarily provide capital to ongoing
enterprises with collateral. You are unlikely to walk in with a “business plan
and a dream” and come out with a loan.
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Spectrum of sources of capital How much money can you get and how long does it take?
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Don’t Finance Beyond the Useful Life of an Asset
“ONE MORE YEAR OF PAYMENTS AND SHE’S ALL MINE!”
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Don’t Borrow Your Last Dollar
COST OVERRUNS HAPPEN – DON’T GET CAUGHT!
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Capitalizing Operational Debt
WHAT WILL CHANGE SO YOU WON’T DO IT AGAIN NEXT YEAR?
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Lack of Commitment
WHEN THE “GOING GETS TOUGH” THE TOUGH STICK IT OUT!
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Save money
Protect credit rating – (www.AnnualCreditReport.com)
Gain experience
Network
Plan
Observe
Things to do Before Starting