I spent a lot of years working with lenders, and I’ve spent a lot of time since then working with farmers who are working with lenders. Last fall, I attended a two-day session for farm educators about investments and credit, and the lenders there shared seven of the biggest mistakes they see farmers - and especially beginning farmers - make when working their lenders.
1. Under-the-Table Transactions
If you don't report cash transactions to the IRS, you can't expect your lender to use them to evaluate your loan application. Lenders can only use what's reported when they decide whether and how much to lend. Repeated under-reporting of income starves farmers for credit in the future, because you haven't demonstrated your earnings stream.
2. Missing Expenses
When you provide financial projections to your lender, make sure you include all of your expenses. Missing expenses are a red flag for lenders, especially if they are familiar with your type of operation. If you're starting on a new enterprise, think through your expenses for land and infrastructure, labor (including worker's compensation and payroll taxes), machinery and equipment, production expenses, advertising and marketing, and overhead.
3. Mixing Capital Expenses into Income and Expense Projections
Capital expenses - purchases of fixed assets with a long-term use - don't belong on your income and expense statement. Capital expenses are incurred infrequently, so they don't reflect on the profit performance of the business in any one given year. It is important to track them separately. (For a more complete explanation see my blog post on revenue expenses vs. capital expenses.)
Likewise, principal payments for loans also don't belong on your income and expense statement, for many of the same reasons.
4. Past Financial Reports Don't Line up with Projections
The categories in previous financial statements should correlate with the categories in your projections. You may know that what you used to call fertilizer you now call soil amendments, but your banker may not.
Your financial statements tell a story. You can't change the names of the characters halfway through.
If you've changed the structure of your accounts in your accounting software, you may need to take the time to make some changes in a spreadsheet version of your report. If you use QuickBooks, it's a relatively simple matter to export reports to Excel (in other words, to turn an Income and Expense statement into a spreadsheet), where you can change the names of categories, or combine and reorganize as necessary.
5. Not Seeing the Project as a Business
Bankers are essentially investors. If you are asking a banker to "invest" in your operation, you need to treat it like a business. When you talk to your lender, focus on the business value, not on getting a feel for the soil (that doesn't mean you can't talk about the triple bottom line - just make sure you talk about the money first, then come around to the environment and the people). If something goes wrong with your loan, your lifestyle choices aren't going to provide much cover when your lender has to explain things to their boss.
6. Costs and Income are Way out of Line with Reality
Past performance is, in fact, a pretty good indicator of future results. If your projections show large deviations from your past performance, a lender is pretty likely to call that into question - and rightfully so! Big change rarely happens overnight, unless there are significant outside influences (like the price of feed or oil) - and those are likely to be beyond your control.
7. Not Accepting Feedback
Your lender should add value beyond just money. If you are working with a farm or business lender, they've probably got more experience than you do in looking at and evaluating a diversity of operations. Listen to what your lender has to say, and think hard about its value, whether it's about changes in your business or just formatting your reports differently.
1. Under-the-Table Transactions
If you don't report cash transactions to the IRS, you can't expect your lender to use them to evaluate your loan application. Lenders can only use what's reported when they decide whether and how much to lend. Repeated under-reporting of income starves farmers for credit in the future, because you haven't demonstrated your earnings stream.
2. Missing Expenses
When you provide financial projections to your lender, make sure you include all of your expenses. Missing expenses are a red flag for lenders, especially if they are familiar with your type of operation. If you're starting on a new enterprise, think through your expenses for land and infrastructure, labor (including worker's compensation and payroll taxes), machinery and equipment, production expenses, advertising and marketing, and overhead.
3. Mixing Capital Expenses into Income and Expense Projections
Capital expenses - purchases of fixed assets with a long-term use - don't belong on your income and expense statement. Capital expenses are incurred infrequently, so they don't reflect on the profit performance of the business in any one given year. It is important to track them separately. (For a more complete explanation see my blog post on revenue expenses vs. capital expenses.)
Likewise, principal payments for loans also don't belong on your income and expense statement, for many of the same reasons.
4. Past Financial Reports Don't Line up with Projections
The categories in previous financial statements should correlate with the categories in your projections. You may know that what you used to call fertilizer you now call soil amendments, but your banker may not.
Your financial statements tell a story. You can't change the names of the characters halfway through.
If you've changed the structure of your accounts in your accounting software, you may need to take the time to make some changes in a spreadsheet version of your report. If you use QuickBooks, it's a relatively simple matter to export reports to Excel (in other words, to turn an Income and Expense statement into a spreadsheet), where you can change the names of categories, or combine and reorganize as necessary.
5. Not Seeing the Project as a Business
Bankers are essentially investors. If you are asking a banker to "invest" in your operation, you need to treat it like a business. When you talk to your lender, focus on the business value, not on getting a feel for the soil (that doesn't mean you can't talk about the triple bottom line - just make sure you talk about the money first, then come around to the environment and the people). If something goes wrong with your loan, your lifestyle choices aren't going to provide much cover when your lender has to explain things to their boss.
6. Costs and Income are Way out of Line with Reality
Past performance is, in fact, a pretty good indicator of future results. If your projections show large deviations from your past performance, a lender is pretty likely to call that into question - and rightfully so! Big change rarely happens overnight, unless there are significant outside influences (like the price of feed or oil) - and those are likely to be beyond your control.
7. Not Accepting Feedback
Your lender should add value beyond just money. If you are working with a farm or business lender, they've probably got more experience than you do in looking at and evaluating a diversity of operations. Listen to what your lender has to say, and think hard about its value, whether it's about changes in your business or just formatting your reports differently.
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