Character still speaks loudly – which is never more apparent than when applying for financing. If you can convince your loan officer that you have the experience, the drive and passion, the financial assets and the financial preparedness to make a business venture thrive, you will be uniquely equipped for success as you navigate the waters of agricultural financing.
In a recent webinar courtesy of Penn State’s Business, Entrepreneurship & Economic Development Team, co-presenter Jodi Lynn Gauker discussed the “5 Cs of Credit” – helpful terms to anyone looking at financing.
Character was noted as the most impactful category, encompassing everything from industry experience to past repayment history. Other “Cs” included the borrower’s availability to repay the loan based on on-farm and off-farm cash flow, the capital and collateral assets the borrower has on hand and the conditions or characteristics of the loan being considered.
All of these topics will be evaluated by a loan officer. It’s advantageous to evaluate them yourself as a business owner. Where do you stand?
Preparedness is key. Recordkeeping has never been easier with options ranging from GoogleDocs to more sophisticated software like Quickbooks. It’s important that you utilize these tools to maintain solid financial statements.
Solid financial recordkeeping will make you and your business “bankable/grantable.” Well-kept, thorough financial records position you for success with the loan officer or reviewer. Thorough records provide an excellent benchmark against others in the industry, allowing you to gauge success through various ratios.
Examples were given in the context of product output, like “pounds of milk per cow” or “pounds harvested per row/acre,” but any type of inventory/output comparison could be made. Concise records also help you as the farmer evaluate operational strengths and weaknesses.
One co-presenter noted, “If something didn’t sell as well during the season, that would show up in your records. You might plan to remove it from your crop plan and plant something else instead.”
What are the three key financial records to have on-hand when approaching a lender? A cash flow statement, an income statement (also often notated as a profit and loss statement or P&L) and a balance sheet.
As a business owner, you should have a projected cash flow – what is estimated to come into and out of the business. A cash flow statement helps track those data over a specified period of time. It will indicate any issues with the collection and billing cycle. It can also help you evaluate when during the season you might need a short-term or revolving loan to help carry your business through to busier sales weeks ahead.
The semantics of the cash flow statement are determined by the business owner. It can be monthly or quarterly, but typically, it showcases a year of operations. The cash flow statement is incredibly important when communicating with a lender. It helps the lender become acquainted with the operational flow of your business and helps educate them on your specific needs. They might have other loan options or tools available that would better meet the needs of your business than what you first approached them for.
Never assume your lender knows your operation on the level that you do.
Next is the income statement or P&L statement. While a cash flow illustrates the flow of resources through your business operation, the income statement showcases your total revenue and operational expenses over a given time period. It illustrates your business’s profitability.
As noted, “you want to make sure you’re telling the whole story of your business.” A typical income statement includes the cash income, cash expenses, changes in assets and liabilities and the net income and loss for the business. The income statement usually showcases an entire year and is used for recordkeeping, enterprise evaluation and cost analysis.
Finally, the balance sheet: Session co-presenter Brian Moyer likened it to a “snapshot in time” – how much would your business worth if you had to sell it today?
The balance sheet typically comprises two columns: your business assets (cash, business possessions that could converted to cash) and liability (what you owe or are obligated to pay)/owner’s equity (the value of the business on the right). The business’s on-hand assets should equal the sum of liabilities and owner equity.
Learning to cultivate detailed versions of these three documents can save you a lot of headaches when the time comes to approach the lending process for your farm.
The session ended with some simple tips surrounding preparedness, which will inform all of your financial recordkeeping. First, pick one focus annually to work toward, with the goal of being a better business owner. If you try to address the entire operation at once, you will not be successful. Recordkeeping should be a key focus for any business.
Second, be a proactive business manager. It’s easy to get caught up in day-to-day operations. Intentionally set aside “office time” weekly or monthly to get a “bird’s-eye view” of your business.
Third, be tax-strategic, not tax-driven or tax-avoidant. Paying taxes means your business is profitable.
Fourth, keep good habits. Keep all invoices and receipts organized in a central location and update your books regularly. Start an emergency fund for the business or commit to contributing to it each quarter.
Each step of the process is another foot forward in proving your capacity to your lender and equipping your business for success.
by Andy Haman
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