Business of Agriculture: Personal Credit Impacts Business Financing

By Jerry Nance

The Business of Agriculture series covers finance, accounting and other business topics to help both beginning farmers and ranchers as well as experienced operators. Jerry Nance is a vice president with Farm Credit of Western Arkansas, working in Hope, Arkansas. He’s been with the Farm Credit System for more than 30 years.

There’s no question that agriculture is a capital-intensive undertaking, so the ability to obtain credit is essential. Unfortunately, this can sometimes be a challenge, in part because an individual’s personal credit score can impact a lender’s review of a loan request.

Three different credit scenarios can cause stumbling blocks, though it’s important to understand that how the situations are handled is even more important than the situation itself. Lenders have some degree of latitude in making credit decisions, so demonstrating responsibility, honesty and a proactive approach to settling a negative credit situation can go a long way to securing your business financing.

1. Lacking a sufficient credit history. Credit scores are built over time with the responsible use of credit and consistent on-time payment of credit obligations, so it stands to reason that a younger operator may simply have not had the time to do that. In this case, the lender will look beyond the credit score to determine how any existing credit obligations have been handled. Certainly making timely payments on consumer debt is essential. Most lenders believe that the way an individual handles things from early age will likely stick with them for the rest of their life, so demonstrating commitment to these financial obligations when young offers the lender some degree of confidence that a new loan will also be repaid responsibly. The lender will also determine how consumer debt was used – did the borrower buy a used pickup truck for the farm or a speed boat for fun? Using credit as a tool rather than a convenience speaks to a conservative financial outlook that is appealing to a lender.
    
2. A negative or difficult financial situation. Maybe they’ve missed a series of payments on consumer debt, or they’ve had a car repossessed for lack of payment. Mistakes happen, but how they’re handled means a lot to a lender. Does the borrower admit the mistake, take responsibility and tackle the situation head on to make good on their obligation? Again, for a lender, how someone has handled a situation is a fair indicator of how they’ll handle future obligations. There are also strengths that can outweigh such credit weakness, such as completing an educational degree, getting a good job or having a spouse with strong credit who is also committed to the agricultural operation. If the potential borrower can document that things are now going in the right direction, the lender is more likely to offer credit, perhaps a smaller loan that will allow the borrower the opportunity to build their financial reputation and earn additional credit over time.
    
3. A parent has borrowed in their children’s name and handled that loan inappropriately. This situation is less common, but it does happen. Starting out with the best of intentions, parents can end up ruining their children’s credit. Few children will want to pursue legal action in this situation, so it’s up to them to come clean to the lender, explain the situation and start taking steps to rebuild their credit.

Regardless of the situation contributing to a low credit score, the bottom line is that whether a borrower is applying for their first loan or is expanding an established operation after 30 years, it’s never too late to demonstrate responsibility and work to build a positive financial reputation so you can obtain credit, grow your wealth, and be positioned to take advantage of opportunities when they arise.