10 Questions to Ask Yourself Before Applying for a Farm Loan

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Before starting or running any venture, including farming businesses, capital is a primary consideration. Unlike other businesses that pick up faster, farming businesses seldom generate enough revenue or operating profits timely to fund their capital needs. This includes owner demands, asset replacements, interest payments, and time debt payments. This typically makes it difficult to expand such ventures.

Nevertheless, acquiring agricultural or farm loans can help you fund such payments to attain your business goals. Agricultural loans are ideal for all farmers, whether you’re looking to profitably maintain your current operational level or expand your agricultural business. While acquiring a farm loan seems inevitable, it is essential to run through several questions before approaching a lender or signing any loan agreement.

Some of the questions to ask yourself before applying for a farm loan include;

1. What is the Intention of the Farm Loan?

Having a clear motive for applying for a farm loan is important. Several reasons can trigger farmers into acquiring an agricultural loan. This includes purchasing or leasing land for agricultural operations, start-up, buying equipment, initial loan restructuring, and expanding the farming business.

It is crucial to have a clear motive on why you want to acquire the farm loan as it will affect several factors, including:

  • The loan amount
  • Repayment terms and period
  • Selection of loan lender

A definite purpose in applying for a farm loan ensures that you firmly understand how you’ll utilize the capital to attain particular objectives for your farming business.

2. Who is the Best Farm Loan Lender for Your Agricultural Financial Needs?

Concerning your intention of taking a farm loan, choosing the appropriate lender is crucial in acquiring the funds. The purpose of the loan is a significant factor as different lenders offer different farm loans. Similarly, your choice of lender might also affect the funds you’ll acquire and the payment terms.

However, if you have an existing loan, you might opt to return to the same lender for better terms, but that’ll depend on your relationship with them. Before making your choice, you should compare the loan limits, terms, repayment policies, and interest rates. It’s important to know what the lender offers before finalizing any loan deal and have clear, structured terms.

3. How is Your Business Liquidity?

It would be best to assess your working capital (calculated by deducting current liabilities from current assets) and current ratio (current assets divided by current liabilities). After the loan is approved, you should also consider checking your working capital ratio to the gross revenue and be aware of your farm’s recent numbers and pro forma status.

4. What is Your Business Profitability History?

Identifying your farm business’s profitability history, preferably for the latest year, is vital. It would be best if you also had a run-through of its annual profitability in the former five years of operations to establish a clear pattern of the profit margin.

You can do this by analyzing the yearly tax returns, probably calculated in cash. Yearly accrual profit-and-loss reports will also be crucial in this procedure. This information will help you understand your farm’s profitability levels, how consistent or volatile profitability is, the returns rate on farms’ equity & assets, and the profitability trends.

5. What is Your Business Solvency State?

You can best understand this question by knowing about your equity-to-asset and debt-to-asset ratios. This information is also critical in the loan application and your farm’s pro forma status after loan approval.

6. What is Your Farm Loan Repayment Capability?

How capable are you of repaying the farm loan? It is vital to have a clear plan on how you intend to repay the loan to avoid any defaults and possible denial of another loan. This should also help you limit the amount you can take as a farm loan, as it’s wise to bite only as much as you can chew.

You should develop capital and operating budget to showcase the loan’s impact on your farm business. This should be displayed on the cash flow capacity meant to level the loan’s interest & principal schedules and its effect on profitability.

7. Do You Understand All the Loan Requirements?

Understanding the loan covenants is crucial to avoid hitting you and the lender. Ensure you are clear with the loan requirements, such as a particular year-end working capital level, to keep your farm loan in good standing. If possible, you can negotiate with your lender on the given loan covenants to get the best and most comfortable deal for your farm business.

8. Are there Any Prepayment Penalties on the Loan Terms?

Be aware of the implications of early farm loan payments contrary to the initial loan repayment schedule. You should do this before signing for the loan and negotiate for better terms if it’s possible. If there are no prepayment penalties on your farm loan, be careful not to damage your farm’s working capital if you opt for the early payments approach.

9. What’s Your Business’s Legacy or Timeline?

Before proceeding with the plan, it would be best to consider your farm business’s legacy, which entails the owner’s age and comfort levels. This ideally depends on the loan’s purpose, scope, and magnitude. If any factors affect the repayment ability, you should consider renegotiating the loan terms to avoid defaulting.

10. What’s the Stakeholders’ Involvement in the Loan?

How much will the stakeholders be involved in the application and attainment of the loan? Typically, all stakeholders are required to sign the loan documents for approval. However, it would be best if you informed them of the intent of the loan, the expected impact, and the business’s ability to repay it. Such considerations will avoid any arising issues.

If you require any assistance to further understand the factors to consider before making any farm loan decisions, or you’re interested in applying for an agricultural loan, contact United Farm Mortgage. Book a consultation appointment or send your inquiries for all your farm loan needs.