The vast majority of new business owners look for financial assistance to get their ventures off the ground, especially farmers. The majority of loan applications are turned down, which is a shame. In light of these figures, it is likely that many small business owners you know have had their applications rejected.
Even though approving every application would be a time saver, it would be impossible to maintain. Similarly, lenders must use caution while lending money, just as you do when lending your things to others. Consider having a brand-new ski boat and dealing with a steady stream of demands from relatives and friends to “borrow” it. Before handing up the keys, you’d probably give it some thought.
In the eyes of lenders, your farm and ranch loan application serves as the best indicator of whether or not they can trust you with their money.
Causes for Farm Loan Denials
An Insufficient Amount of Previous Experience
Lenders will look into your business’s history and cash flow to create a more accurate picture of how likely you will be able to pay your commitments. If your company is very young, it will likely lack the track record necessary to inspire trust in its customers. The good news is that several lending choices are best suited for younger companies. Before you apply for a particular loan, you need to check that the length of time your company has been in operation meets the conditions for that loan. If you don’t change this, you will waste everyone’s time.
Because lenders base their choices on the information in your application, if you fail to send in the appropriate papers, forget to fill out a piece of the application, or include incorrect information, you make it much simpler for them to reject your request. If you can’t even be trusted to fill out an application accurately, how can anyone put their faith in you with a significant amount of money?
Gathering your financial records and making preparations for your company plan well in advance of the moment when it is time to submit an online application will allow you to avoid the situation described above.
A Business Plan That is Not Very Impressive
Lenders are interested in knowing the specifics of how, when, and where they plan to spend their money. You’ll be able to address all of those questions and demonstrate that you’re capable of strategic thinking if you create an engaging business plan.
Consider, to return to the illustration from earlier, what would happen if someone asked to borrow your boat but failed to provide any information about where it would be going or when it would be returned. You would never give your consent to a request with that much ambiguity.
An Insufficient Credit Score
Because it is a condensed version of several financial aspects, such as the speed with which you pay off debt and the number of times you meet the bare minimum payment requirements, your credit score is an essential component of your history. It should be no surprise that potential lenders want to look at these aspects. They will even include a credit criterion with most of the loan products they provide, and they will inform you immediately whether your score meets the requirements.
You should never apply for a loan that demands a higher credit score than your own since there are always alternative options available to you in terms of financing.
Even the most competent business owners might be sidetracked by circumstances that make it impossible for them to meet their duties. Lenders typically protect themselves from this risk by requesting collateral, an asset they might take ownership of if the borrower defaults on their loan obligations. Lenders find it more difficult to grant your request if you cannot produce a sufficient asset, such as a home or automobile.
Dangers Facing the Industry
Because sectors like restaurants, construction, and farming are well-known for their volatility, lenders are unsurprisingly more prone to feel cautious about providing loans to businesses in these areas. You may lessen this impact by ensuring that your business plan and application are of the highest quality. Despite this, there is still a chance that you may be rejected. If this happens, you should consider applying for funding via the Small Business Administration (SBA), which is designed specifically for business owners who have been turned down for loans by other sources.
Debt Utilization Dangers
Because no loan stands alone, you should anticipate that the lender will look at your other financial commitments. You are considered in the “safety zone” when you have a sufficient amount of accessible credit and only utilize a minimal amount of that credit. It demonstrates that you have borrowed money in the past responsibly and are familiar with how to handle the repayments.
On the other hand, if you are already using your available credit, the potential pressure from making so many payments can frighten potential lenders.
If your application has even one of these problems, there is a good possibility that it will be rejected completely. It is essential to remember that several kinds of loans are available to accommodate virtually every circumstance that can be imagined. If you are not approved for a particular loan, see this setback as a chance to evaluate your company and make improvements so that you can do better on future applications. Keeping this mindset will ensure that you are always growing. You will finally have the funding to show for it due to your efforts.
How to Prevent a Farm Loan Denial
- The best way to prevent a farm loan denial is to be proactive and organized. Have all of your financial information in order and accessible.
- Prepare a detailed budget and forecast for your farm operation, highlighting your expected income and expenses.
- Ensure you demonstrate a strong credit history and good credit score.
- Discuss your farmland value, production history, and marketing plans with the lender.
- If you have any questions or concerns about the loan application process, don’t hesitate to seek help from an agricultural lender or other ag-focused professionals.
There are many reasons why farm and ranch loan applications might get denied. It’s important to be aware of the most common reasons to avoid them and increase your chances of getting approved. If you’re worried that your application might be denied, it’s best to speak to a loan officer and get their advice.