Do’s, Don’ts & Best Practices Preparing for a Loan Mickie Nuss – F&M Bank Sara Meidinger – Bank of Stockton Thursday November 2nd, 2017

Do’s Bring everything the Banker needs Tax Returns last three years – both personal and business (if available) Prior year financial results for income & expenses Balance Sheet business Personal Financial Statement (PFS) Current Annual Farming Budget

Cash based vs. Accrual based Cash Based Statements Accrual Based Statement Tax Returns Does not include many items required by the Bank Typically under/over state income or expenses Does not accurately report working capital and net worth Much better and typically required by banks Includes Accounts Receivable, Accounts Payable, Inventory, Cash Invested in Growing Crops If you don’t prepare Accrual Statements – Banker can help you

Working Capital What is Working Capital = Current Assets - Current Liabilities Current Assets Cash – Money in the Bank Account Receivables – Money people owe you Cash Investment in Growing Crops – Money already spent on next years crop Current Liabilities Accounts Payable – Money you owe people Balance on Operating Line – Money you owe the bank Other Accruals Payables – Money you owe your employees, govt., PG&E, etc.

Working Capital (cont.) Why is working capital important? Banks use working capital to determine if they can lend you more money Banks want to see positive & large working capital Purchasing equipment using cash erodes working capital Purchasing equipment using operating lines of credit erodes working capital

Do’s (cont.) Know Amount of the equipment – copies of invoices Timeline for the purchase – when do you need the $$ Understand Working Capital and impact equipment purchases have on it

Do’s (cont.) Budget needs to show that you can repay the loan Make sure properly financed – term of loan, timing of payments Understand important terms; interest rates – fixed or variable Repayment – monthly or annual payments leasing options – tax vs. capital lease

Don’ts Purchase equipment solely to avoid paying taxes My motto - “make as much money as physically possible and pay taxes” Ask for loan on Dec 24th – Banker needs time Erode working capital by paying for all equipment with CASH Use operating line of credit to purchase equipment – BAD

Best Practices Communicate with Banker constantly During annual line renewal – request a “Capex” equipment line What is this? Show Banker why new equipment is needed/justified If you have questions – go see your Banker Make your Banker buy you lunch

Questions? Mickie Nuss – F&M Bank, 209.367.2444 Sara Meidinger – Bank of Stockton, 209.340.2310