As you are applying for new operating loans or new term loans with your current lender(s) or a prospective new lender, do not be surprised if you encounter more difficult requirements and discussions for loan applications in 2020. What are a couple of the requirements that lenders will require you to meet?
Income Tax Returns and Balance Sheets
Your loan request to a new lender will most likely require the last 3 years of Income Tax Returns and corresponding Balance Sheets. Since your current lender should already have your prior years’ Tax Returns and Balance Sheets, you will need to provide the most current year’s Tax Return and Balance Sheet so they can update their file on your farming operation. This information helps prove your farm’s results and hopefully shows an operating profit trend that provides the available cash to repay your loan interest and principal due. Regardless of your multi-year operating profit trend, perhaps your most current production cycle year does not allow available funds to repay loan interest and principal. What then? Keep reading for more information.
Your Balance Sheet reflects current assets such as livestock and crops to pay the remaining operating loan balances on last year’s expenses as well as loan payments that are due before any livestock sales or new crop sales are realized in the coming year. This comparison is referred to as liquidity, and the most commonly used liquidity measure used is Working Capital. Working Capital is the funds available from the following equation: Current Assets less Current Liabilities. The Balance Sheet also includes long term asset market values along with long term loan principal amounts that, combined with your working capital position, reflect the solvency of your business. The two most common solvency measurements are the Equity to Asset Ratio and the Debt to Asset Ratio which indicate to the lender the margin of safety of either doing business or continuing business with your farming operation.
Changes in Your Farm Operations
Once the measured financial history of what you have accomplished is provided, there should be a consideration of changes in your operation going forward. Are you expanding the operation or remaining constant in size? Are you considering specialty livestock or crops to increase revenue? Do you have prepaid expenses that lower expenses in the coming year? Are there new family members working with you in the coming year? Are you close to retiring or changing ownership of the operation?
The projected financial impact of the considered changes should be reflected in a financial forecast of the coming calendar year and next production cycle. More commonly known as a budget or cash flow projection, this financial report projects the operating profit and net cash flow of your business’s next fiscal year as well as the next year’s production cycle. This is an indicator of your business’s ability to continue building equity.
If your business doesn’t have available funds to repay loan interest and principal in the coming year, then develop an Action Plan that may involve capital asset sales and debt repayment, or a loan restructuring plan that would allow your business operations to continue. Be prepared to share and provide answers to the lender as to why it’s in the best interest of both the lender and you to implement that plan.
Longer Approval Time
Regardless of your business’s position, potentially expect a longer period to get your loan application approved. Discuss the loan request with an accountant or financial consultant for their evaluation of the strengths and weaknesses of your business relative to your loan request. Be ready to build on your strengths and be ready to discuss your weaknesses and the steps you are taking to address each.
If you need help working with your current lender or preparing to tell your business’s story to a potential new lender, contact the experts at AgriSolutions. We can start with a free consultation, where we’ll gain an understanding of your financial management needs and then explain to you how we can help.
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