When a farm credit lender is evaluating a farmer, what data points matter the most?
While I’m not a loan officer, I’ve been asking a lot of farm credit lenders what matters most in a farmer loan application. Here’s what I’ve learned:
Farm credit lenders evaluate farmers holistically. Cash flow, farm assets, and credit history are often data points in the larger picture (some lenders call this picture the “5 C’s of Farm Credit“). With so many factors in play, what information is the most important?
First off, “farm net worth”, or “farm equity”, matters. This data point is important because it shows “the difference between what you own and what you owe“. This is also an important measure of the farm’s liquidity. How do lenders calculate farm net worth? They add up a farmer’s assets (assets can include balance sheet items like cash and checking, crops grown, accounts receivable, livestock, and farm buildings/farm land), and subtract the farmer’s liabilities (items like accounts payable and farm debt). This number determines the farmer’s net worth.
If the farm business has a low or even a negative net worth, the best way to improve this number is to enhance farm profitability. We’ll get into this more in coming posts, but as a sneak preview, here’s a quick guide for 3 steps that can boost farm profitability. Please stay tuned for more important data points in Part II and III coming this week.