Resource Guide for Vermont's New and Aspiring Farmers
Access to Capital
By Dennis Kauppila, UVM Extension; Annette Higby, Attorney at Law; Don Maynard, UVM F.A.R.M.S; and Liz Veskosky, USDA Farm Service Agency
Farms can be very expensive hobbies. A good business plan can help to make sure that your farming venture will be a business that contributes to family living expenses instead of an expensive hobby. First though, you must think through which you want--a hobby or a business? If it will be a hobby, good luck to you and I hope you have fun.
If it you are hoping for a business, you must think about capital needs and profit. Capital needs include buying machinery and equipment, livestock, buildings, and land. Plus you will need money to cover your operating expenses until you begin to sell a product. Starting up can be difficult. You will need to have some assets, either cash in the bank or collateral (land, buildings, machinery and equipment or livestock) in order to borrow any money. Lenders are often very wary of loaning money for a start-up operation. They would rather see you with an operating business that is creating a profit, then come in to borrow money for additional equipment, land, a new barn, or more livestock. It can be tough to get that first agricultural loan.
Quite often, when working with farmers, I ask how much the farm is contributing to the family’s living expenses. In a number of cases, the farm does not contribute any cash to the family. So, on these farms, there must be some off-farm income to support the family, or maybe contribute medical insurance. On other farms, there is no off-farm income, and profits from the farm totally support the family. Which kind of farm are you planning on having?
Types of Capital Needs
There are two types of capital needs to operate a farm business—money for operating, and money for ownership of assets.
About Agricultural Loans
At some point, you will need to consider debt financing or taking out an agricultural loan to finance one or more of your capital needs.
A loan proposal or business plan is the best way you can demonstrate to a lender your understanding of and commitment to the success of your business. Before you approach any lender, it is important to prepare this paperwork to prepare for your meeting. Lenders expect that you know your business and understand your finances. The more informed you are, the better your chances of getting the financing you need. If you want to borrow money, you must be able speak the language of finance. So it is important that your proposal or business plan include basic financial statements like a Balance Sheet (or Net Worth Statement), Operating Statement (or Profit and Loss), and Cash Flow Statement. Most lenders will also want to see income tax returns from previous years.
A lender will likely use the following A Five C's when reviewing your loan application.
X Capacity to repay the loan. The lender will look at the financial ability that you and your farm has to pay back the loan based on the history of the farm, on-going cash flow, and assets you hold.
X Capital or the money you have already invested in your business. Do you have sufficient capital to support ongoing operation of the farm as well servicing debt? Better still, do you have enough capital to operate the farm during tough times?
X Character or the general impression you make on the lender. This is a subjective judgment on the part of the lender as to whether you and your business idea will succeed. They will look at your qualifications, experience and management skills, as well as your personal credit. The better prepared you are before you meet with a lender, the better your chances of making a good impression on the lender with regard to character.
X Collateral are the assets you own that the lender uses as a backup to recover funds if you happen to default on the loan. Think about the assets that you will put up as collateral. Is the liquidation value of these assets sufficient to pay back the lender in case of default?XConditions surrounding the intended purpose of the loan are also considered. How risky is your farm enterprise? What are the current economic trends of the farm = s commodity and/or markets? Do they make your future success more or less likely?
If your loan application is turned down by a lender, federal law requires that the lender tell you, in writing, the specific reasons for the denial. You may be denied because one of your A Five C's is weak, you have poor credit, or simply that the financial institution is not familiar with the type of agricultural business in which you are pursuing.
If your loan is turned down because of a poor credit report, you may request a free copy of the report from a credit report company. Check it for accuracy and completeness as you have the right to dispute any errors. If you have a poor credit history, start repaying outstanding balances on time to re-establish an acceptable record and then try to apply for a loan again.
Vermont Agricultural Lenders
There are several lending institutions in Vermont that make agricultural loans. The following list of lenders is not intended to be exhaustive. Rather, it puts in one place, the major sources of agricultural financing organizations in the State of Vermont. While banks and other for-profit organizations offer competitive interest rates, governmental lending institutions, such as the USDA Farm Service Agency and the Vermont Agricultural Credit Corporation, offer entry loans at subsidized rates to encourage business start-ups. Typically, these subsidized sources have a five to seven year limit on the length of loans, with transfer to the more commercial sources expected at that time. In all cases, however, a detailed business plan, including market analysis, projected first year cash flows, risk management, and exit strategies will be expected as a part of the loan application process. Sources for help with this planning are included in the “Additional Resources” section and should be used prior to any contact with the loan institutions.
In addition, including in the appendix are detailed descriptions of lending programs offered by five of the institutions listed below.
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