4 Tips to Secure a Farm Loan for Your Farming Business
Ezra Cabrera | January 28, 2019
It’s no secret new farmers may have a hard time qualifying for a farm loan. As with other businesses, it’s difficult to secure financing if you don’t have an existing history of sales and operation. That said, there are ways to increase your chances of receiving loan approval. So, don’t give up just yet.
The loan application process can be difficult and daunting, especially if you’re new to the industry. If you’re not prepared, your loan application could easily fail. And as you know, without a loan, it will be difficult for you to manage, or even keep your farm business going. Financing is an extremely important aspect of every business venture.
First and foremost, you have to be prepared. You must determine how much money you will need, why you need it, and how you’re going to repay it. This will prove to the lender how responsible you are in handling your finances. Aside from that, here are a few key planning tips to get you started when applying for your first farm loan:
1. Create a Detailed Business Plan
A lot of people ask why it’s important to submit a business plan when applying for financing. The reason behind that is that your business plan gives the lenders an overview of how you’ll utilize the cash they’ll provide. For instance, if you’re planning on applying for equipment financing, your business plan must show the reason why you have to obtain that specific equipment. It should show what or how it will contribute to its success.
Related: 6 Reasons Why Equipment Financing is the Best for Your Business
With that said, lenders expect you to have done your homework before you apply for funding. Creating a detailed business plan or loan proposal shows lenders that you’ve thought things through. When creating a business plan for a farm loan, make sure to answer the following questions:
- Do you have land or facilities available?
- What are your financial goals?
- What’s your budget?
- Is there a demand for your crops? (Include volume requirements and production goals to illustrate said demand.)
2. Organize Your Finances
Since you’re applying for a loan, you can be sure that potential lenders will check your business’ financial capacity to repay the borrowed amount. They will want to review financial documents like your balance sheet or cash flow statements, as well as your business history.
If you’re a first-time farmer and you don’t have a history of farm profits just yet, consider implementing these options before applying:
- Use your savings to start your business (even if it’s with just a handful of customers).
- Ask family and friends for a loan.
Not only will this give you a record of sales to physically show lenders that there is a demand for your product, but they will also appreciate that you took the initiative to start your farm with your resources. Let’s say you’ve done this and you’re ready to speak with a lender. Be sure you have the following documents prepared:
- Sources and uses of funds
- Balance sheet
- Income statement
- Statement of cash flows
- Insurance information
- Marketing plan
- Credit history
Be sure to have these documents ready when applying. Aside from that, try to ask lenders what other documents will be needed for your application. This way, you won’t have to go back and forth to the bank to deliver the lacking documents. This will also help speed up the application process.
3. Provide Collateral to Secure Your Farm Loan
Collateral is the assets you already own which can be used to repay the loan in the event you fail to pay it back. There’s a good chance you will need to provide potential lenders with collateral to secure your loan. This will help minimize the risk the lenders face as they decide to let you borrow money from them. Depending on the lender, you can pledge non-farm assets or your personal assets as long as their value is equal to the value of the proposed loan.
Related: Why Do Lenders Need Personal Guarantees for SBA Loans?
4. Character: Make a Great First Impression
Potential lenders will check your experience and management skills, qualifications, as well as personal credit to determine your eligibility for a loan. Prepare thoroughly. You only have one opportunity to make a good first impression so make it worthwhile.
Ask the right questions and answer the lender’s questions honestly and clearly. The better you prepare yourself for the application process, the more attractive you’ll be as a borrower to the lender. When you make a good impression, you increase your chances of getting approved of a loan.
Securing a Farm Loan is Important!
There’s nothing worse than an undercapitalized farm business. Not only will it hinder your ability to provide high-quality goods to your clients, but it can also ruin the reputation of your business. With farm loans, you can obtain only the best quality of crops and make sure that your customers will be satisfied with the goods they bought from you. This will help your name be known in the industry and open up a lot of opportunities for scaling. With farm loans, your business will be unstoppable.