Obtaining a Loan - The C's of Credit

One of the biggest questions a new grower faces is where and how to get loans for business start up.
Obtaining a Loan - The C's of Credit - Articles
Obtaining a Loan - The C's of Credit

Even after the start-up phase, loans often continue to impact business establishment and expansion.

Put It In Writing

Many small agricultural businesses are started using personal savings, funds from friends or family, or credit cards. While these are all options, you may wish to obtain a loan from a lending institution due to a need for a piece of equipment or moderate expansion. There are many options when considering who to approach when you are seeking a loan.

Even if you are approaching friends or family, the loan should be written to avoid any conflicts in the future. Prepare a written document that states the amount of funds borrowed, interest rate (if any), and the term of the loan. Having the written document will help eliminate any future conflicts. It does not need to be fancy but it should be in writing.

You should also spell out what the funds will be used for and how you plan to cover the repayment of the loan and interest. Most commercial lenders will want monthly payments so if you cannot make monthly payments at the beginning of the business, you will need to demonstrate when you will have sufficient funds to do so.

"The C's of Credit"

Lenders will use the term "The C's of Credit." These six C's are:

  • Credit history
  • Character
  • Capacity
  • Collateral
  • Conditions
  • Capital

Credit history

If you are approaching a commercial lender, the first thing you should do is obtain a copy of your credit report. They will be able to determine if you have any prior problems so make sure your report is as accurate as possible. Commercial lenders put great weight on your credit score and they will check to see your score, always. This is probably the most important C.

Character

When meeting with your lender, be professional and courteous; you are approaching them for funding so keep this in mind. The days of lenders knowing your entire family and their history are over. In the past, most lenders may have known your family for several generations, but this is not usually the case today. They will need to get to know you in a short period of time and will make the recommendation to the loan committee or supervisor above them.

Capacity

How will you pay back the funds? Will you have enough potential income to pay the interest and principal of the loan? If you have a business plan, this will be outlined in the plan along with the supporting documents. A business plan will also impress the loan officer in that you have taken the time to create the plan and have developed several scenarios that will support your claim that you do have the capacity to make payments.

Collateral

Lenders do not want to sell property to cover borrowed funds. Many small agricultural businesses begin as sole proprietorships. This means you are the business and the business is you. Anything you own, or partially own, may be used as collateral for the funds you are requesting. If you want something protected, do not list that as collateral. This may be easier said than done as the lender will want to be sure their funds are protected.

Conditions

These are the conditions of the general, regional, local, economies as well as the economic health of the industry you are in or proposing. These items will impact your loan request and the interest rate you are offered.

Capital

This is the level of investment you are willing to make in the business. You will not be able to obtain a loan for 100% of needed investment. If you have been in business for a period of time, you should have developed some owner's equity. If you are just beginning the business, borrowing all of the start-up funds will be very difficult. You may need to combine several funding sources to achieve your goal.

Where To Start

There are several programs that cater to (broadly defined) new and beginning producers. AgChoice and the Farm Service Agency (FSA), both have programs specifically for new and beginning farmers. Check with your local offices for more details about these programs.

Almost every business will need to borrow funds at some point. You are not alone in needing additional funding to achieve the goals you have set. Follow the above recommendations and you should be successful if you can satisfy the C's of credit.

Authors

Agricultural Economics, Sociology, and Education

More by Lynn Kime