The Business of Agriculture: Decision Factors in Lending

By Dan Seedorf, VP of Lending, Premier Farm Credit

The Business of Agriculture series covers finance, accounting and other business topics to help both beginning farmers and ranchers as well as experienced operators. Dan Seedorf is Vice President of Lending with Premier Farm Credit. He is based in Yuma, Colorado, and has been with the Farm Credit System for 12 years. 

Farm Credit associations consider all types of loan requests, including operating, equipment and real estate purchases and in some cases for non-farm investments. For every single request, we consider the “Five Cs of Credit” and assess the risk involved for each of the five factors.

1. First and most important is the Character factor. This critical component to our research includes evaluation of the applicant’s credit report that reflects loan payment history, loan and credit card balances, collections, bankruptcies and other pending legal issues. We also look at management skills, coupled with the purpose of the loan, and how it enhances the applicant’s farming or ranching operation.
    
2. Capacity analysis is the evaluation of the applicant’s ability to repay the loan. We use tools such as a Profit and Loss Statement, Tax Returns, Accrual Income Statements and Enterprise Projection and Cash Flows to determine the “capacity” the operation has to meet its debt obligations.
    
3. Capital is the assessment of the applicant’s net worth and leverage. This factor is analyzed using the Financial Statement, also known as the Balance Sheet. This statement is the compilation of all assets and all liabilities. This factor is a great tool to determine the applicant’s ability to seek opportunities and also withstand adversity based on working capital and leverage levels.
    
4. Collateral analysis evaluates and values the applicant’s assets that they are providing to secure the loan. The collateral Premier Farm Credit secures for each loan depends on the purpose and term of the loan and typically consists of crops, equipment, accounts, livestock or real estate. Our standards require the borrower to have at least 30 – 35% available for a down payment or equity in the collateral position.
    
5. The final factor is Conditions. This factor explains the terms of the note to the borrower including any potential requirements such as insurance, documentation or additional issues that need to be resolved. 

Evaluation of these factors varies from loan to loan and from lender to lender. Your local Farm Credit association will be able to provide additional information regarding their lending requirements and loan processes.

This article was used with permission from Premier Farm Credit, which serves Eastern Colorado.