SW Financial Literacy
How To Get Financed Part 1: Character
Getting approved for financing isn’t random, the 5 C’s of Credit are fairly well know and used universally:
Character
Capacity
Capital
Collateral
Conditions
Each lending institution looks at these a little different and may prioritize one over another. To get approved for financing, you need to chin the bar on most of the C’s. To get the best terms out of your financing, you want to accel at all 5.
Reputation
Character is your reputation.
If you are known as a good farmer and are well liked in the community, people (and lenders), want to work with you. Your family’s reputation can give you a boost in the loan process. When you have a family member that vouches for you and will step in to help if you have financial struggles, their character and financial strength become yours.
Your reputation can take a lifetime to build but can be gone in an instant.
Those with a history of being difficult to work with by challenging and frequently firing professionals could soon run out of local options for financing. A bankruptcy stays on your credit for 7 years (depending on which type of bankruptcy) but could take a generation to overcome.
Honesty
How does a lender who has never met you know if you are honest?
Balance sheets are filled with information about your life and required for most loan applications. Assets that are overstated or misleading will stand out in an appraisal or during the verification process. Debts left off the balance sheet are discovered when searching deeds, checking Uniform Commercial Code (UCC) filings, and pulling a Credit Bureau Report (CBR).
If something slips through the cracks the first year, it is almost always caught over time as balance sheets and tax returns do reconcile to each other after a few years.
Pro Tip: It is in your best interest to provide every detail possible about your operation when applying for a loan. If you have minority ownership in a non-farm family business and family trust, provide those details both through balance sheets and tax returns. When you know the breakeven by field for your whole operation, provide it. This is kept private and cannot be shared with others.
By bringing this data forward at the start, you come across as a prepared and organized individual who treats their farm as a business and takes money seriously. Every unanswered detail the lender doesn’t understand about your finances or operation can be counted against you. You want there to be no questions on how you are doing business.
A complete story is better understood and supported than one with several pages ripped out.
Discipline
How serious are you about farming?
Every loan you have taken out is a promise that payments will be made on time. It is the lender’s job to put on a loan that will be paid back. A history of late payments on any type of note can show a trend they don’t want repeated.
(Side note: Medical past dues can be overlooked due to various factors.)
Debts showing on the CBR that were not put on your balance sheet raise a red flag. High credit card balances and an outsized number of equipment/vehicles/toy loans can imply a lack of spending control. All factors that are taken into consideration.
CBR’s show a long history and are a good measure of how you use and repay debt.
Show these attributes and you will check the box on ‘Character’. Step #1 for getting financing.
Key Takeaways:
Reputation -Be someone people want to work with.
Family support -It isn’t required but can be a bonus.
Honesty -Accurate information up front.
Open book -Don’t withhold details, the more the better.
Discipline -Responsible debt levels paid on time.
Have a great week!
Grant
All views expressed on this site are my own and do not represent the opinions of any entity whatsoever with which I have been, am now, or will be affiliated. Information provided is authentic to the best of my knowledge, and as such, is prone to errors and the absence of key details. The content of this blog is for entertainment and informative purposes and should not be seen as professional advice to finances or any other field.