Financing for first-timers

Two bankers offer tips for young producers preparing to talk to a lender

When asking lenders for money, make sure you know your expected revenues, expenses, net worth, cash flow and how you’ll make payments. Don’t be afraid to ask lenders questions, especially around ratios.

Getting prepared to meet with a banker to get a loan can be fraught with anxiety, especially if you’re young, eager to build a cattle business, and don’t have a lot of financial experience. Canadian Cattlemen talked to two experts about how to better equip yourself for success.

“First and foremost, I’d want to know their experience in the industry,” says Melissa Reinhardt, manager of business development with Farm Credit Canada (FCC). “If they don’t have a lot of background, I’d want to know if they have a mentor or family, or someone else who can help.”

Besides having been in the financial sector for more than 10 years, Reinhardt knows the beef industry personally, since she and her partner own a 300-head commercial herd of Simmental-Red Angus cattle near Red Deer, Alta.

Have a business plan

She also thinks having a business plan is a good idea.

“If you’re fresh off the street, you need to have a plan,” she says, noting that it doesn’t have to be a hugely complex document. “You need the basics — who you are, what you want to do, how it’s going to work, and the numbers.”

Todd Andries agrees, and says that having a business plan is not only good for when you’re talking to financial institutions, it also helps with decision-making through the year. Andries is regional vice-president for Conexus Credit Union and is based in Saskatchewan.

“Financial institutions want to know how you’re going to manage risk — so know what’s the best-case and worst-case scenario and how you’ll handle it,” he says, adding that this information should be in the business plan.

Know your numbers

Both agree on the importance of knowing the numbers, which include expected revenues, how payments will be made, and what expenses will be incurred. It’s also important to know your net worth (what you own and what you owe), and cash flow (what you’re going to make and what you’re going to spend) which will give you what’s left over for payments.

You also need to know how much equity you’ll be putting into the venture.

“You have to have some skin in the game — if we’re going to loan you money, we want to know: What are you willing to put in?” Reinhardt says.

“Most banks will need between 10 and 20 per cent equity,” she says. “If you don’t have that, perhaps your parents or someone else can support you with it.”

Many times, she says young would-be producers are very enthusiastic and come looking for 100 per cent loans. While she applauds the energy, she cautions that applicants need to be realistic.

She says FCC has several tools and templates on its site to help, including a cash-flow planning guide, which goes through money in, money out, and whether there’s a positive balance at the end of the day.

Government help

Andries points out that there are also government programs that can help — and any institution would know about them.

For example, he says if you haven’t had farming income for five years, you can qualify for 90 per cent financing under the Canadian Agricultural Loans Act (CALA) program. Basically, it’s a government-backed loan guarantee program in which, if the loan goes into default, Ottawa will pick up most of the tab.

He says it’s also a good idea to bring in your tax returns to demonstrate your financial history and to paint a picture of your business year. If it’s a cow-calf operation, when are the calving dates? When are you going to sell? Will you sell all at once, or background heifers over the winter?

The picture should also include things like whether land is rented or owned and whether the feed will be grown on the farm or bought from elsewhere.

Answering these questions will ensure payments can be structured properly.

For younger farmers, Andries also advises having access to family or mentors who can help meet the challenges and opportunities of starting up a business.

“Sometimes it gets overlooked, but I think there’s a lot to be said for having someone to lean on and help guide the production side of the operation,” he says.

Growing over time

Young farmers typically can’t afford a lot of debt in the beginning, so buying a whole herd from parents or neighbours at the outset might not be in the cards.

“I usually advise them to buy cattle a few at a time — incrementally,” Reinhardt says, adding that FCC has a transition loan that disburses the money for up to five years, which helps take the pressure off.

She says they can also just do a straight vendor purchase with parents or a neighbour.

Andries says growing too fast is one pitfall young farmers should avoid. He warns against retaining too many replacement heifers to build up the herd because it can seriously constrain revenues and cash flow.

“Growth has to happen over a reasonable amount of time,” he says. “An aggressive plan will make your cash position tough, and you risk overextending yourself.”

Ratios

Both Andries and Reinhardt say that young farmers shouldn’t be afraid to ask their lend- ers questions — especially around ratios.

“Understanding what the bank’s conditions for lending are is very important,” Andries says.

Last November, Reinhardt did a farm finance presentation during a webinar sponsored by the Beef Cattle Research Council. In it, she took the audience through several ratios, one of which was the current ratio, which compares assets to liabilities and measures the ability of the producer to meet financial obligations.

Basically a current ratio of higher than 1.5 is healthy. Between one and 1.5 could mean trouble if market conditions worsen. A ratio lower than one means there might be trouble making payments, but if it’s too high, it may mean the money isn’t working as hard as it could.

Andries also says that livestock insurance is often an overlooked product. Participating in the Western Livestock Price Insurance program is a way to lock in the price of cattle if market prices decline.

“It protects the downside — and if you’re a young farmer, you don’t have the balance sheet built up enough to absorb some of those one-offs,” he says. “I call it self-preservation, and making sure you’re around next year.”

Credit scores

Reinhardt says that for young people who may not have much equity yet, having a good credit score is a great way to demonstrate to lenders that you can handle loan repayments.

“Pay your Telus bill on time, pay your Visa on time, so you can build a healthy credit score,” she says.

FCC has a starter loan for 18- to 25-year-olds for up to $50,000 that Reinhardt says she’s seen work well in terms of buying a few cattle and building a credit history.

View your lender as a partner

Andries says that having a good relationship with your lender is key.

“You need to find someone you can trust, someone who has your best interests in mind,” he says, adding that it’s a good idea to keep them in the loop to stay on track.

He also says that if you don’t like what you’re hearing you can get a second opinion from another staff person or even another institution.

Reinhardt says it’s healthy to look at your lender as a partner in the business — and if you’re not comfortable, there are lots of lenders out there who may be a better fit.

What if you get turned down?

Finally, both experts say that, if after all the talking and negotiating, the lender says, “no,” he or she should offer up options on how young producers can get to “yes.”

“No banker will turn you down for no reason,” Reinhardt says. “If they’re declining you, it’s because they don’t want to put you in a bad spot.”

Whether it’s increasing revenues, decreasing liabilities, obtaining more equity — or any other issue — the lender can usually help with a plan to get to the place where the loan can be negotiated.

“We’ve seen people with whom we’ve had those tough conversations and they’ve come back after six months or a year and addressed the issues,” Andries says. “They understand that they’re in a better position to get the financing.”

About the author

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Lois Harris is an experienced Ontario freelance writer and editor working in the agriculture and food industry.

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