When obtaining credit to manage a profitable farming operation, it pays to be proactive rather than spontaneous. Establishing a long-term plan and a trusted lender relationship can help farmers avoid the pitfalls of pursuing “convenient” rather than “constructive” credit.
Farm Credit Mid-America senior financial officer Josh Renaker defines the two types of credit that he says most potential borrowers seek. Convenient, or reactive credit, is credit that is fast and easily obtained. However, convenient credit does not always help meet long-term goals, may not be structured properly, and may lead to use of operating funds for capital expenditures.
“You don’t want to buy equipment with your operating loan and then not be able to pay input expenses because the funds were used for something else,” he says.
On the other hand, constructive credit helps meet the needs of the operation’s short- and long-term goals and helps farmers maintain a sustainable financial operation.
“The answer to obtaining credit should not automatically be yes,” says Renaker. “Credit is constructive when it covers a full understanding of the operation. An appropriately structured loan will address your goals and help make sure you are covered down the road.”
So how do you work with a lender who will steer you in the direction of constructive credit? Farm Credit Mid-America is able to meet customer needs through such options as fixed versus variable/adjustable rates and loan conversions, in addition to the benefits that come with being a member of a cooperative.
“We understand agriculture, and we know Indiana, Ohio, Kentucky and Tennessee. We bring value to our customers,” says Renaker. “For example, we call our customers when we see ways to save them money with a refinance. And as a cooperative, we are able to return cash dividends to eligible customer-members through our patronage program. It is a powerful membership benefit.”
In return for helping secure the right loan, Renaker says a customer’s willingness to be transparent during loan discussions is the best approach to meeting the credit needs of any operation.
“A lender needs to know your numbers and history from an accrual perspective to know your true profitability and prevent putting an operation in a bind,” says Renaker. “When we understand a customer’s goals, we can set up loans appropriately, whether that is buying property, retirement or bringing someone into the operation. It is critical to have that dialogue.”
The hardest challenge in that conversation, adds Jennifer Ferris, Farm Credit Mid-America financial officer, can be getting complete, accurate information on the balance sheet and determining working capital, equity and overall net worth.
“We have to know where you stand to give you the best solutions,” she says. “You need to be intentional when you are seeking credit for your farm.”
“Having consecutive year-end balance sheets combined with the Schedule F will allow us to gather an accurate picture of profitability,” explains Renaker. “It provides customers good feedback on how much money they made the previous year instead of trying to get that information just from their Schedule F. A complete balance sheet can save you money when everything is included because you may get a better rate.”
Bottom line, Renaker and Ferris say Farm Credit Mid-America always has the best interest of its customers at heart.
“While a lender may have to say no to a credit request from time to time, we always do what is best for that individual,” Renaker says. “Even if we do not make a loan, we can be a resource on rent trends, farm programs and other information to help make farmers successful.”
“We educate our customers to help them better understand why we do what we do. And in doing so, we build trust,” Ferris added. “We want to see you be successful, and we’ve found that the best way to accomplish that goal is by having two-way transparency. When you’re open and honest with us, we’re better positioned to help your business thrive.”
Learn more from Josh and Jennifer in the informational video above.