When applying for your first loan, it’s important that you are aware of certain information that you will need to provide to your lender. Before going to meet with a loan officer, there are four main things you should think about and gather. A lender will ask you a lot of questions, but they are important when it comes to building a relationship and moving forward with a loan request.
The first item you will be asked about is a balance sheet. Your balance sheet is the steppingstone for your loan request. This is where a lender can start to determine where you’re sitting when it comes to working capital, net worth, and owner equity. Working capital is very important as it’s your current assets minus all your current liabilities. This is the money or inventory used to meet your short-term obligations. Your net worth is your total assets minus your total liabilities with your owner equity being the percentage of your balance sheet that you own. The balance sheet is also where a lender will start to look at collateral for your loan request.
Second, your historical income and expense will be analyzed. This could be as simple as three years of tax returns, or actual income and expense records that you or an accountant has prepared. This gives your lender a good depiction of what your operation has been doing in the past.
The third thing you will need to think about is a projection. This is arguably the most important step in applying for your first loan. Having a complete and accurate plan of all projected income and expenses will show the lender your ability to repay the loan. If you’re an existing farmer or rancher, figure out your cropping plan and average production history (APH) for the upcoming year. Be sure to know your cattle numbers, and what you will be marketing for the next production year. The projection helps the lender determine loan terms as well. Beginning farmers may require a longer term or maturity to meet cash flow needs.
Lastly, why are you applying for a loan? Maybe this is your first operating line, or you’re making a capital purchase to expand your existing operation. Having a plan in place will help you be more aware of your operation and give the lender key information when it comes to your needs. Have an idea of different programs you can take advantage of with federal, state, and local agencies, especially if you are a young and beginning farmer.
These few things will help you get started with applying for your fist loan, but don’t be afraid to ask questions. Your lender is here to direct and give you advice on how to structure your operation financially.