Before sitting for an important test, students do their prep work, helping to ensure they can answer even the most difficult questions. Before a young and beginning farmer applies for a farm loan, they should do their homework. Given how capital-intensive farming is, it’s essential for young and beginning farmers to get started on the right foot in business and their lender relationship.

Established creditors want to work closely with borrowers over time to help them establish and grow their businesses. The long-term, trusting, and transparent relationship between a borrower and lender is built on open, candid communication, starting with the first meeting. Today’s newest farmers should be prepared to communicate what is expected from their lender and learn what a lender needs from them.

Detailing Business Finances

The first thing a lender wants to see is a Balance Sheet that details assets, liabilities, and equity. In short, it’s a financial statement that demonstrates what’s owned, owed, and any investment made in the farm business. 

Project Cash Flow Statement

The second financial statement to prepare is a Projected Cash Flow Statement, which shows when and from where cash is expected to flow into the operation and how it will be spent. 

Explaining Business Plans

Thirdly, complete a Business Plan. This comprehensive document provides a lender a snapshot of the farm business today, plans for the future, and potential obstacles the farmer should manage. 
Develop a well-rounded set of short and longer-term goals including business, family, and personal objectives, ensuring each is complimentary with another. A good set of goals is the foundation of any business plan, so make sure they are SMART (specific, measurable, achievable, rewarding, and timely).
A business plan describes the scope of the operation including a list of the farms to be operated, any rental terms, and whether the land will be operated on a crop share or cash rent basis. If it’s a cash rent arrangement, then the rental rate, term of rental arrangement, and payment schedule of annual rental payments should be included. A marketing plan, break-even analysis, and risk management plan – incorporating crop insurance if appropriate – and other risk mitigation techniques, should be detailed.
The business plan also shares information about the borrower, including a description of overall background and experience in the industry. Identify plans for continuing education opportunities, whether through mentorship, industry conferences and seminars, or formal classes. 

Income History

A fourth and final statement a lender will want to see is an Income History to help assess a farmer’s viability as a farm owner-manager. Identify other sources of income, which can include off-farm jobs or even family contributions. 

Finding Assistance

To complete their homework prior to their first lender meeting, a lot of thought, research, and effort is required from young and beginning farmers to pull together financial reports and an effective business plan. Lenders like Farm Credit Illinois are prepared to support new borrowers with initiatives such as the Fresh Roots young and beginning farmers program, which provides lending assistance and learning incentives – Helping the Next Generation of Farm Families Succeed. 

Steve Witges is a Farm Credit Illinois regional vice president over the Effingham, Highland, and Red Bud regional offices. With more than 30 years of experience, he leads farm financial analysis workshops for young and beginning farmers as part of the Association’s FreshRoots learning incentives program.