To start a new enterprise, a farmer generally needs two things — a plan and a loan.
While farmers should try to self-fund their new farms or sideline businesses as long as possible, they often reach a point where they need outside funding, said S. Gary Bullen, a North Carolina farm management Extension associate.
Bullen spoke about preparing to get a farm loan in a recent webinar hosted by North Carolina State Extension.
In his experience, most farmers start with a few acres and scale up. Few beginning farmers can get a loan to buy land.
“The people with several hundred acres did not buy that land themselves,” Bullen said. “Those who are full-time farmers almost never bought that land themselves. It was family land or it was (bought with) other income.”
Bullen works with farmers to determine where they want their business to be in five years. That goal is based on the size of the farm, buildings and machinery needed, cash on hand and the size of the loan.
“If you start at age 65, they won’t have as much time to build this farm, and they may need to borrow more up front to grow this farm,” Bullen said. “If you start with too much debt, it’s almost impossible to overcome this with agriculture prices the way they are.”
Lenders want to see solid financial management, including a list of start-up costs, balance sheet, income statement, cash flow, production records and financial records.
The start-up costs can vary widely depending upon what the farm produces and the capital required.
Bullen offered an agritourism farm as an example.
Renovating the barn and fences is the largest cost at $75,000, but creating a parking lot, signage, playground, picnic tables and walking trails can push the cost past $80,000 even before labor costs.
Beef operations can cost almost as much to start.
By contrast, starting a mushroom business with 100 grow logs costs just $1,000.
“I can probably self-finance mushrooms,” Bullen said.
To manage costs, farmers should make sure their equipment is the right size. A fence costs the same, whether it encloses five cows or 20.
Farmers should also compare hand work to the cost of labor-saving equipment.
“Usually people start out optimistic about how much work they can do, and that they can do it all themselves or have their children help them,” Bullen said. “Both of those are very optimistic.”
Commercial banks are an obvious place to seek a loan, but farmers have other options, including Farm Credit, the USDA Farm Service Agency, credit unions and — although Bullen advises against this — family and friends.
Crowdfunding websites such as Kickstarter and GoFundMe are possibilities to raise modest amounts of money.
People who give to these campaigns typically expect something in return, such as a gift or a share in the farm’s output.
And those seeking the loan must give a very good reason why people should send them money, such as solving a problem or developing a clever product.
Going to the Lender
When sitting down with a lender, farmers should be prepared to explain the business in depth — where it is today, where it has been and where it is going.
The balance sheet, with its list of assets and liabilities, shows the business’ financial position at a point in time, but it does not necessarily show whether the farm is profitable.
Lenders want to see three to five years of tax returns to get a sense of the person’s performance over time.
“People who have been successful will become more successful. It can kind of predict where you’re going to go in the future,” Bullen said.
Though lenders look at all of a farmer’s assets when making a loan decision, it’s a good idea to separate the farm from one’s personal finances, he said.
Complementing these measures of past and present performance, a business plan and cash flow projections show the lender where the farm might go in the future.
“When you put it down on paper, it becomes real. It lets you see, ‘Does this really make sense?’” Bullen said.
One-third of businesses fail, he said, because of a lack of cash flow.
“A cash flow statement is like a checkbook,” Bullen said. “A lender wants to know what kind of cash you expect to receive and what bills you have to pay.”
To see how these documents apply to a farm, consider a strawberry business.
The business plan would note that berries are a high-value crop, but a few growers can easily saturate a local market.
“If three or four people are already doing strawberries, there’s probably not room for you,” Bullen said.
The cash flow analysis would note that strawberries, as a seasonal crop, would provide income for only a small part of the year.
Still, lenders may see strawberries as a safer bet than hemp, which has only been open to commercial production for one year — not long enough for many farmers to know how to grow it well.
Farmers should do their best to be realistic in their projections.
“My experience working with new farmers is many are very optimistic. I’ll always get the best yields and prices and get enough labor,” Bullen said. “If you talk with an old farmer five minutes, you’ll get another story.”
Lenders will also want a stack of other documents to fill out their understanding of the farmer’s situation.
These include the completed loan application form, one to three months of bank and utility statements, pay stubs, proof of collateral such as property titles, crop insurance records, Dairy Herd Improvement Association reports, rent contracts and prepayment receipts.
If all of this legwork seems a huge hassle and that using a credit card would be much easier, resist that urge, Bullen said. Loans have much lower interest rates.
Getting a farm loan can be challenging after five years of low prices for many commodities.
To increase their chances of success, farmers should consider the Five Cs of borrowing that lenders use:
• Capacity to repay the loan
• Capital/cash on hand
• Condition of the economy as it relates to the business
• Character — the general impression the farmer makes on the lender.
Assessing character is not as subjective as it might sound. Though banks do care about honesty, they also want a track record of business sense.
That could be established with one’s credit history, credit score, reputation and farming experience.
Age and health can also predict whether a person will work long enough to make the farm profitable.
The big question a lender has to decide is whether the farm can repay the loan.
Banks want their debtors to succeed, but businesses at higher risk of default often face higher rates and stricter terms.
“Some come back really mad that a lender turned them down. If you don’t know why, you didn’t do your homework,” Bullen said.