Navigating the financial landscape as a young or beginning farmer can be challenging, but understanding how lenders evaluate your operation is a critical first step toward securing the funding you need to grow. At FCS Financial, we’re committed to supporting the next generation of farmers, and we know that a clear, transparent process helps build a strong foundation for success. The FCS Financial Connect program outlines FCS Financial's dedication to young, beginning farmers.
How Lenders Evaluate Your Financial Position
Think of a lender’s review as a comprehensive health check for your business, much like a farmer scouting their fields for signs of strength and potential issues. When you apply for a loan, we look at several key factors to get the full picture of your financial position.
- Capacity: This is a review of the capacity in your budget to repay all your debts. We analyze your current and projected income alongside your current and future obligations.
- Liquidity/Working Capital: We analyze your working capital to understand your cash flow management and your ability to handle short-term obligations. It’s important to ensure you have enough on hand to meet your debt obligations for the next 12 months. If a new purchase impacts your cash reserves, we evaluate your position afterward to make sure you can still adapt as needed throughout the growing season.
- Balance Sheet Analysis: We examine your balance sheet to determine your net worth and the structure of your assets and debts. This helps us see the big picture of your financial standing.
- Collateral: Lenders also assess your ability to secure the loan with collateral. We understand that this can be a challenge for young producers, so we have special credit standards and encourage you to discuss collateral options with your loan officer.
The Role of Income and Existing Debt
Your income is a critical factor, and we evaluate it in a few ways. We look at your historical, current, and projected income. For young producers, we know that operations can change significantly year to year, which is why providing us with the best information possible helps us make the most accurate estimates of your projected income.
Existing debt also plays a significant role in lending decisions. We often start by calculating your solvency ratio (Net Worth divided by Total Assets). While a higher ratio is generally better, we recognize that young farmers often start with lower ratios. We also analyze your cash flow to ensure you can cover your debt payments and assess if your debt level aligns with the scope of your operation.
Key Indicators for Young Producers
For young producers, we place a special emphasis on several key indicators:
- Income Strength: Since you may have a lower net worth, a strong income is crucial for covering both debt and living costs.
- Operational Efficiency: We look at strong production, marketing, and expense management as a sign of a well-run operation.
- Repayment Ability: Your capacity to repay is a key factor we must consider to ensure the loan aligns with your business success.
- Risk Management: Agriculture is a cyclical industry, so mitigating risk is crucial for the long-term health of your operation.
What If You Have Limited Financial History?
It's common for young producers to have a limited financial history. In these cases, we also consider your background and experience, such as growing up on a farm, or participating in FFA/4H. The strength of your business plan and financial position is key. Completing a basic business plan demonstrates that you are serious about the management and success of your operation.
FCS Financial offers many options for direct support and also works alongside the Farm Service Agency (FSA) when their products are the best fit for a member’s current needs.
Essential Financial Ratios
Understanding a few key financial ratios is essential:
- Working Capital: Calculated as Current Assets minus Current Liabilities, this indicates your ability to meet short-term obligations. A healthy range for young farmers is typically 15-20% of Gross Farm Income, though this can vary depending on the operation.
- Owner Equity: Calculated as Net Worth divided by Total Assets, this measures ownership. A healthy range for young, beginning farmers is 20-40%.
- Debt-to-Asset Ratio: This is your Total Debt divided by your Total Assets.
Additionally, off-farm income is a factor we consider, as we assess its reliability and potential impact on your ability to repay debt and cover family living expenses.
At FCS Financial, we’re here to help you succeed. We hope this overview has been helpful, and if you have any questions, please reach out to us.
