How Lenders See You

Bankers have a lot to consider going into 2020. Here's how they evaluate operating loans and unpaid debt.

As lenders make on-site visits, many emphasize in their assessment how well equipment is being maintained. (Progressive Farmer image by Jim Patrico)

Securing operating loans for the upcoming crop season will bring new challenges for some borrowers, but there are ways to make farm operations more cash-worthy in the eyes of today's lenders.

Start with a thorough overview of the farm's financial statements to make a great first impression, says John Blanchfield, consultant with Agricultural Banking Advisory Services. He notes often financial statements are an area that needs help, with bankers spending too much time reconstructing customers' financials as a first step in the loan process.

"If a banker has to use up so much of their time working on getting the financial statements right, they have less time to evaluate the credit request itself," Blanchfield says. "A banker will naturally gravitate to those applications that don't require a huge amount of detective work."

There are four steps to borrowing success, he notes: the plan and request by the grower; financial statements and numbers; a site visit by the lender to the business; and evaluation of the total package by the banker.

"Two areas where producers could greatly improve are in the financials and the site visits," Blanchfield explains. "The latter is your opportunity to showcase what you have, that you are a serious going concern. I know for sure, as an example, that a banker looks at maintenance of machinery."


Jordan Foland, vice president and commercial/ag lender with First Farmers Bank and Trust, Lafayette, Indiana, agrees machinery on a farm is an important element bankers consider.

"I want to see the machinery line. Is it all brand-new equipment?" he considers. "Is it used stuff they take great care of? Does the machinery look like it's been sitting outside since the day it was purchased? Generally, I put eyes on an operation before I make a final decision."

John Bhend, vice president, ag/commercial banking for CCF Bank, Albert Lea, Minnesota, says he's a visual learner, so he likes to see the farm earlier rather than later in the lending process.

"They don't have to have new machinery, but is what they have well-maintained, and is their operation organized?" he asks. "My general impression is that if someone is taking care of the little things, the big things like profitability and management will be in good shape."


Bankers don't like surprises, Michael Langemeier notes. That means it's important to always know how every facet of the business is doing in terms of profit.

"I think most farmers have a good handle on some of their costs but not all of their costs," says the Purdue University ag economist and associate director of Center for Commercial Agriculture. "They may have a pretty good feel for their seed, fertilizer and chemical costs. But, they may not have allocated expenses for repairs, general insurance, crop insurance and even fuel, to some extent."

Langemeier breaks it down into three levels of knowledge an operator needs when it comes to the farm's profitability. First is the overall view. Basically, this level is concerned with whether gross revenue is above expenses. The second level evaluates individual enterprises on the farm -- crops versus livestock or corn versus soybeans. The third level is even more detailed and considers individual fields in terms of what the return is versus the costs.

While many farmers today are increasingly evaluating costs and returns on a field-by-field basis, this isn't the norm. The reluctance to do this is, in part, due to the work involved in attempting to allocate expenses like insurance or repairs to a particular part of the business.

"An easy first step is to allocate expenses on a prorated basis per revenue shares according to how many acres are involved," Langemeier says. "Make it simple to start. Corn has higher revenue than soybeans, so proportionally more expenses are allocated to that crop."

From there, make adjustments to a simple prorated system. For example, 40% of tillage may involve corn, 60% beans. Reallocate more fuel and machinery expense back to the crop where a higher percentage of tillage is used as part of the overall operation.

"Like everything else, the first time you do this is by far the hardest," Langemeier says. There are several accounting software programs that can help.


Enterprise accounting done on-farm would be welcomed by Foland, but he says they don't even expect farm operators to have used accrual versus cash accounting.

"Most of them are in cash accounting, that's why we can do our own accruals," says First Farmers' Foland. Otherwise, his bank expects to see three years of tax returns from a new customer along with (ideally) a year-end balance sheet.

"So much can vary from year to year depending on expenses that are prepaid and inventory that is carried from one year to the next," he says, adding for the most part, producers who have survived are well aware of their costs of production.

Beyond those basics, Foland says he considers a handful of ratios that help gauge the health of the business in making loan evaluations. Those include the debt service coverage ratio, the debt-to-asset ratio and the current ratio.

Debt service coverage ratio measures an operation's cash-flow available to pay down debt. This number is derived by dividing debt service (total debt obligations for the year) into net cash income. Net cash income equals farm revenues after taxes minus operating expense and interest payments -- but including other income or off-farm income.

"Anything over 1 on debt service coverage means a positive cash-flow," Foland explains. "Typically, we'd like to see at least 1.2, but in recent years, it has been difficult to get there. If it's over 1 right now, we're pleased."

Debt-to-asset ratio is total liabilities over total assets. The result, hopefully, will be 30% or less. Having debts greater than 30% of total assets can hurt an operation's ability to withstand unexpected business challenges or be able to take advantage of opportunities.

Current ratio measures the extent to which current assets, if liquidated, would pay off all current liabilities. The higher the ratio, the greater the liquidity. Current assets include cash, accounts receivable, inventory, marketable securities, prepaid expenses and other liquid assets that can readily be converted into cash.

Current liabilities are a farm's debts or financial obligations due within one year. A number of operations have debt they originally put on 15-year loans, Foland says. "They now have, maybe, eight years left to pay. There is a fair amount of opportunity to stretch that debt back out to 15 years or longer to gain some breathing room."

Other factors, often less tangible, can make an impact on lenders, too, consultant Blanchfield says. He recalls visiting a Pennsylvania mushroom farm that employed a number of Spanish-speaking workers.

"I noticed that this farmer addressed everyone he interacted with in Spanish," he explains. "He struggled with Spanish, but you could see the effort was appreciated by the workers. This doesn't have anything to do with the balance sheet but how this human being treated those who worked for him."