Getting Credit AG BM 460

Introduction Agriculture and others in the Food System need credit Hard for banks to provide enough – too risky Sources of credit What banker is looking for What should borrower expect Business & Marketing Plans

Holders of Ag Debt 2001 Commercial banks (40.8 percent) Farm Credit System (28.2 percent) Individuals and other, including suppliers (21 percent) Life insurance companies (6.2 percent) USDA's Farm Service Agency (3.8 percent).

Sources of agricultural credit Commercial banks 32% of real estate – 51 % non real estate debt Farm credit Life insurance companies – 13% of farm real estate debt Suppliers Family sources

Farm Credit Network of federally chartered, borrower- owned cooperatives specializing in agricultural loans. Created in 1916 to provide long-term fixed-rate mortgage loans to farmers A major source of agricultural credit and a major competitor in agricultural credit markets. Some federal guarantees of loans

Five Keys to Credit Conditions Character Capital Capacity Collateral

Conditions Size & viability of operation Type of operation Specialization Industry conditions

Character Management ability –Production –Financial Honesty and integrity Repayment performance Legal structure

Capital Working capital (current assets – current liabilities) must be positive Current ratio (current assets/current liabilities) should be > 1.5 Equity ratio (net worth/total assets) should be > 0.5

Capacity Operating expense ratio Earnings before interest, taxes, depreciation, and living expenses Production capacity Provide a balance for trouble Secondary repayment capacity Coverage ratio ((EBIT-LE)/debt service)

Collateral Protect the lender Provide control of repayment source How easily can collateral be sold Stability of the value of collateral Durability of the collateral

What a lender expects from you accurate balance sheets and income statements each year a cash flow budget a year in advance and review it with your lender a good set of business records a businesslike manner with a positive attitude

What a lender expects from you (cont) Arrange for credit in advance of making any major purchase Give your lender time to review your plans and make suggestions Maintain good communications with your lender Avoid split lines of credit if possible

What a lender expects from you (cont) Do everything possible to build confidence, understanding and trust between you and your lender Set long-range goals for your business and your family A Business Plan A Marketing plan if you are selling something special

What you should expect from a agricultural lender A commitment to agriculture and to serving customers at all times a good knowledge of agriculture a willingness to make periodic visits to your farm or ranch To be an expert on agricultural financial management

What you should expect from a lender (cont) To be cooperative and sincere To honor commitments To provide prompt action on credit requests To explain in detail reasons for not approving a request for credit keep all matters totally confidential

What you should expect from a lender (cont) To explain all services the institution can provide and show how he or she can help if your credit requirements change in the future

Tips on Preparing and Presenting a Loan Request Be prepared for questions Be precise about your loan request –How much? –What for? –How will I repay? –What is collateral?

Tips on Preparing and Presenting a Loan Request (cont) Provide back-up details Outline your payback plan Be forthright Be prepared to sign… and sign Be a long-term thinker

Business Plans Description of business Market Competition Location of business Management Personnel What money do you need and why

Business Plans (cont) Financial data Supporting documents Resumes Personal financial requirements Credit reports Copies of leases Contracts Anything else relevant

Marketing Plan Market Summary Product Description – what makes it special? Competition Product Positioning Communication Strategies Launch Strategies

Market Plan (cont) Public Relations Advertising Other Promotion Pricing Distribution Vertical Markets/Segments International Measuring Success Schedule

College Pizza Suppose you wanted to buy College Pizza A competitor of Canyon Worse location Roughly comparable You have experience in managing a pizza parlor You have $50,000 that your father has kicked in

You need to borrow $150,000 What do you need to do?

Concluding Comments Credit can not be assumed You have to earn it Business Banking is not an impersonal relationship