As a farmer, you meticulously scout your fields or watch your livestock, looking for signs of stress or opportunities for growth. At FCS Financial, we approach your financial statements with a similar eye, seeking to understand the health and potential of your operation. We know that securing financing is a critical step in cultivating your agricultural dreams, and our goal is to provide a clear, high-level overview of how our team evaluates your financial situation.
The Initial Assessment: A Holistic View
When you apply for a loan, our primary objective is to assess your overall financial health. This involves a comprehensive review of your financial standing, assessing key areas that paint a picture of your operational strength and future prospects.
1. Liquidity and Working Capital: Your Financial "Rainy Day Fund"
Just as you need sufficient moisture for a healthy crop, your operation needs adequate liquidity. Our first stop is your liquidity or working capital position. This tells us if you have enough readily available assets (like cash, grain, or market-ready calves) to cover your debt obligations and operational needs within the next 12 months.
- Working Capital: Calculated as Current Assets minus Current Liabilities, this metric is crucial for evaluating your ability to meet short-term obligations. For young and beginning producers, a healthy range is typically at least 10% of Gross Income, though this can vary based on your specific operation and cash flow.
- Liquidity: We assess your ability to convert assets to cash, ensuring you can "right-size" potential borrowing needs without undue strain.
2. Net Worth and Owner Equity: Building Your Foundation
From liquidity, we move to your Net Worth position, which represents the total value of your assets minus your total liabilities. This provides a snapshot of your overall financial equity.
- Equity: We calculate this by dividing your Net Worth by your Total Assets. This ratio indicates how much of your asset base you truly "own." While young and beginning farmers typically start with lower ratios as they acquire assets and take on debt, a healthy range for young producers is generally at least 15%. Equity tends to increase as an operation matures.
3. Composition of the Balance Sheet: Understanding Your Investments
The balance sheet is a window into your operation's structure. We analyze its composition to understand:
- Are low liquidity levels due to recent capital purchases (e.g., new equipment or land)?
- Is your debt primarily structured against real estate, equipment, or a combination?
This breakdown helps us understand how your assets are leveraged and how your debt is aligned with your long-term goals.
Evaluating Your Income: The Lifeblood of Your Operation
Income is the engine that drives your farm. We evaluate it in several ways:
- Historical Performance: We typically analyze income over a 3-to-5-year average, adjusting for any recent changes in your operation. This provides a baseline of your earning potential.
- Current Income: What income streams are in place today?
- Projected Income: For rapidly expanding or contracting operations, we carefully vet borrower-prepared projections to understand the anticipated impact of changes on your ability to generate income. Realistic income and expense projections, including details on acres, animal units, etc., are invaluable.
A stronger income-earning potential can often offset a weaker liquidity position, especially for young producers who are still building their balance sheet. Conversely, a robust and liquid balance sheet can partially mitigate income or repayment concerns.
Existing Debt: A Critical Piece of the Puzzle
Your existing debt plays a significant role in our lending decision.
- Equity Ratio (revisited): As mentioned, the equity ratio is a quick indicator of your financial leverage.
- Cash Flow Analysis: We scrutinize your ability to cash flow your current debt obligations. Are equipment payments consuming too much of your margin? This helps us determine if your current debt load is sustainable and if you can comfortably manage additional debt.
- Impact of Refinancing: If existing debt is being refinanced, we factor its new repayment demands into the updated cash flow analysis.
Assessing Repayment Ability for Young Producers: Building Your Future
We understand that young producers often have limited financial history and are just beginning to build their net worth. For you, income is often a more critical indicator as you need to be able to service all your debt and cover living costs.
Key indicators for young producers include:
- Strong production and marketing strategies.
- Diligent attention to cash operating expenses.
Limited Financial History? We Look Beyond the Numbers
If you have limited financial history, don't worry. We consider other important factors:
- Agricultural Background: Did you grow up on a farm? Participate in FFA and/or 4-H?
- Education and Experience: Do you have an agricultural degree? Have you worked as a farmhand for several years?
- Feasibility of Projections: We assess the realism of your income and expense projections, considering industry standards and any unique plans or contracts you have.
- Support Systems: In some cases, a co-signor or the ability to obtain a Farm Service Agency (FSA) Guarantee can help mitigate the risk associated with a projection not supported by multiple years of performance documented by tax returns. FCS Financial is proud to offer lending options through the FCS Financial Connect program and FSA, which can provide more flexible balance sheet, cash flow, and collateral requirements for young producers.
Key Financial Ratios and Metrics: Our Toolkit
Beyond the broad categories, we utilize specific financial ratios to gain deeper insights:
- Working Capital: (Current Assets - Current Liabilities) - Evaluates your ability to meet obligations in the next 12 months.
- Net Worth: (Total Assets - Total Liabilities)
- Equity: (Net Worth / Total Assets) - Measures how much of your asset base is "owned."
- Cash Flow Ratios: Your ability to repay debt from your income.
- Loan to Value Ratios: How much the collateral securing the loan is worth compared to the loan amount.
Credit History and Off-Farm Income: Additional Pillars of Strength
- Credit History: Your repayment history with other lenders, generally reviewed through a Credit Bureau Report, is a significant consideration. However, if your credit history is limited, the decision will primarily be based on the merit of your operation and financial position.
- Off-Farm Income: This income is absolutely factored into lending decisions. We assess its strength, reliability, and longevity, as it directly increases your ability to meet debt obligations or cover family living expenses. If off-farm income comes from businesses you own, additional analysis and financials will be required.
At FCS Financial, we are committed to helping young and beginning farmers thrive. We understand the unique challenges and opportunities you face. By thoroughly evaluating your financial situation – from your balance sheet and income to your projections and background – we aim to provide the financing solutions that will help you grow your agricultural legacy.
