I was lecturing at one of the banking schools and the following question was posed by one of the participants, “When working with a customer, what would be on your lender’s wish list?”
First, I would like to have a clear idea of the individual requesting credit’s short and long-term vision and goals. A well-defined vision and goals provide both parties with a context of the future of the business, but also personal and family lives.
Accurate and up-to-date business and personal balance sheets are a high priority. With increasing fraud, it is much more important in today’s world to have documentation of supplementary data such as crop, livestock, inventories, and equipment. Ideally, the balance sheets will be complete with all assets and liabilities being listed.
If a lender is working with an existing business, obtaining three years of tax records are critical for the analysis process. If one wanted to make a lender’s heart skip a beat, an accrual adjustment of key current assets and liabilities would be the icing on the cake.
Being handed a projected cash flow would be a lender’s dream. Many producers feel that an annual cash flow or cash flow projection is adequate. However, a monthly or quarterly cash flow allows a deep dive on the timing of revenues, expenses, debt service obligations, and possible capital expenditure needs. What would really please a lender is scenario testing of production, prices, expenses, and interest rates to formulate the boundaries of possibilities in the cash flow statement.
The lender will obtain up-to-date credit scores for all individuals involved in the loan process. However, it is also important for the business owner to understand their own credit report.
If a borrower has nonfarm income sources, evidence of W-2, Schedule K-1, or Schedule C sources of income would be the documentation needed to expedite the loan process. More producers are generating income through off-farm sources such as “side gigs” or short-term projects.
If all of the aforementioned information is organized and analyzed, it allows the lender to obtain a complete picture of the business and advance the loan process. However, the real payoff is for the borrower to be involved and use the same information for better management of the business. Overall, the loan making process can be a win-win for both a producer and lender.
Source: Dr. David Kohl, AgriMarketing
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