Preparing for a Farm Loan with Jessica Harris

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Show Notes

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Summary

In this episode, Morgan Figgins interviews Farm Credit Loan Officer Jessica Harris. Jessica walks us through applying through your first farm loan and what you need to know to make the process easier.

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Transcript

Morgan Figgins:

Welcome to the Farm Credit AgVocates podcast. I'm your host, Morgan Figgins, Marketing and Digital Communication Specialist at MidAtlantic Farm Credit. Today, we're going to be talking about how to apply for your first farm loan and what to know to make the process easier.

I’m joined today by Jessica Harris, a Farm Credit Loan Officer in our Winchester, Virginia office. She started with Farm Credit in 2015 after graduating from Virginia Tech University. She has degrees in both Agribusiness and Dairy Science. Jess grew up on a small dairy farm in Maryland. She currently works with a variety of Ag producers, including orchard, grain, and cattle throughout the Shenandoah Valley. She is also known for helping out and facilitating the AgBiz Masters program out of our Winchester office. Jess, thanks so much for joining us today.

 How are you?

Jessica Harris:

I'm good. Thanks Morgan.

How are you?

Morgan:

I'm good.

Is there anything I missed in your intro that you'd like to hit on?

Jessica:

I don't think so. You pretty well covered it. It's hard to believe I've been here for seven years already, but here we are.

Morgan:

Time flies when you're having fun with Farm Credit.

Jessica:

That's right.

Morgan:

What should people take into consideration when they're getting started on their farm loan journey and starting to look into choosing a lender?

What to Think About When Starting your Farm Loan Journey

Jessica:

There’s a lot of different things to consider, but you want to make sure that that you're really comfortable with that person. You should have easy communication and that you are confident in them and that they are going to support you and your operation.

Other things you also want to think about are what products and services does that lender have, such as having a loan structure that would be successful for your operation. A good example of that would be for a beef operation. If you have a cow-calf operation selling calves once a year, you want to make sure that your loan structures annual payment aligns with the timing of your calving dates. You don't want to have monthly payments if you are only selling calves one time a year. You want to make sure that your cash flow and loan structure aligns.

You also want to look at the different type of payments and services that are offered. Do they offer online payments or services such as crop insurance or educational programs?  There’s also value in making sure you understand not only your interest rates, but also any associated fees with transactions. If you see different rates with different lenders, it may not always be who has the best interest rate. There are other fees that be taken into consideration when you're looking at different options.

Morgan:

Do you have any questions for people to ask lenders to volunteer that information that you would recommend? How do you get that information?

Jessica:

You definitely want to ask about fees because they are a major factor. Some lenders may have origination or processing fees and those can be drastically different from one lender to the next. You also want to make sure that you are comparing the exact same interest rate. You can’t compare a 10 year loan with one lender and a 20 year loan with another lender because there will be different rates for different terms. You want to make sure you are comparing apples to apples.

Morgan:

That makes a lot of sense.

As a loan officer, what do you look for when people are applying for a loan?

What Loan Officers Look for in a Loan Application

Jessica:

There are several things we look for from a financial perspective. The documentation that we ask for are balance sheets, tax returns and business plans. We review all of those to make sure that you're prepared to get the loan that you are requesting. It’s really important to have cash savings to fall back on for your operation.

We then look at your business plan to determine if your operation is going to be profitable and if your projections are reasonable.  We want to make sure that everything lines up to what we think it should be. We also look at your management capacity, which includes your credit score. We pull that with loan applications to see your history of blemishes or what your payment history looks like with other lenders.

When we don't have an established payment history with you, we want to make sure that you would be able to repay us. We want to see how prepared you are, the strengths and weaknesses of your operation and how you're mitigating those weaknesses.

Morgan:

I know we have a business plan template on our website.

If someone has their business plan in their head, are there any other local resources that you would recommend to help put it on paper?

Jessica:

That’s a really good question because I think that's where people can get stuck. It's easy to talk about your goals and dreams, but actually putting them down on paper with numbers can be really challenging. The template on the website is great and I have handed that out to a lot of people to use. It’s an awesome version to get you started and get you thinking about what we are looking in a business plan.

I think using cooperative extension resources are good too.  Most states have different services available. I know Virginia Tech has a lot of resources online, but there's also great resources with Penn State, Delaware, and Maryland. Look around at different universities to see what is available. There are also enterprise budgets available online for different operations with specific generalized costs. If you're a cow-calf operation, you can find a budget to see average expenses for vet bills or hay for a year.

Morgan:

That sounds very helpful, especially for a lot of our beginning farmers or people who aren't coming from generational farms and are trying to get started.

You also mentioned credit, which I know can be a scary word for some. Can you tell us what the five C's of credit are?

The Five C's of Credit

Jessica:

The five C's of credit are character, capacity, capital, collateral and conditions. There’s a lot of different pieces that go into those five C's, but we look at all of them when we consider loan applications. We incorporate that into how we structure a loan and also if you are able to get a loan approval or not.

Character includes your credit score to look at your repayment history, what you've done with other lenders, or if you have established credit.

Capital is what we are looking at when we look at your balance sheet or your financial statement. We are looking at what you owe and any outstanding debts or liabilities. We compare that back to what you own, any assets you have and what that looks like with the loan incorporated into that.

Capacity is expanding on a repayment capacity. We look to see if the operation is profitable or if you have enough cash flow to repay the loan after you cover your expenses. In my opinion, it’s the most important factor because if you don't have the ability to repay the loan, we're not going to give you the loan. We want to make sure that your plans are realistic and that you do have the ability to make payments. We're not going to set you up for failure and put you in a position where you can't make payments.

Collateral is one that sometimes gets overlooked when people are applying for a loan. We have to make sure you have cash flow to pay the loan, but we also have to make sure that the loan is covered from a risk perspective on our side. If you're buying a piece of equipment, we'll usually use that piece of equipment to secure the loan. If you were to not make payments, the sale of that equipment would repay the loan in event of collections. We hope to never get to that point, but we have to think about that and structure the loan appropriately to cover that risk.

Morgan:

It's something that we have to do and have to look at from the lending perspective. That’s something that you’re not necessarily thinking of about when you're applying for the loan.

Jessica:

Exactly.

Morgan:

How do you establish a good credit score when you're just starting out?

How to Establish a Good Credit Score

Jessica:

That is a great question, because I feel like sometimes people are hesitant to apply for a loan with us if they don't have any established credit. Having no history is better than having bad history. Even if you don't have an established credit and you're just getting started, we don't look at that negatively.

The best thing to do is to make sure that all of your payments happen on time with all of your open accounts. That is the highest category that factors into your credit score. 35% of the credit score calculation is your payment history. Making sure that all of your payments for every credit card, installment loan, or any payment that you have is paid on time and you do not miss anything is a very big factor.

You want to also make sure that you are using credit cards operating lines of credit appropriately. Credit cards can be a really great tool to help you build and establish credit, but only if you use them properly. You don't want to max out a credit card, pay a tremendous amount of interest, and keep a stale balance.

The amount you owe on your loans is 30% of your credit score. When the credit score is calculated, it incorporates the balance of your credit card compared to what the limit of your credit card is. It’s not always helpful to increase your credit limit. It’s smart to use credit cards, just use them wisely by making payments on time, paying off the balance frequently and or maintaining a low balance.

Morgan:

I am not a lending expert here, but my first credit card started small.  I used it like I would use my debit card for gas and groceries, and then pay it off each month. It was enough to establish my credit score, but I wasn't charging a lot or running thousands of dollars of expenses that I knew I couldn't pay off. I used it for my day to day, that I would be using my debit card for normally.

Jessica:

That is an awesome way to get established. I had a professor in college that told me he had two credit cards. He had one that he used for his daily gas, groceries and normal expenses and then one he used just for online purchases. He did that because it helped protect his account information, so that if something got stolen online, his account information was only leading back to one credit card. If you used a debit card, someone could access your checking account directly.

Having multiple credit cards isn't necessarily a bad thing either, but it is also not always looked at favorably. From a lender’s perspective, having 10 store credit cards can get risky monitoring them and could raise questions regarding your spending. Keep the cards that you need and use them appropriately.

Morgan:

That all makes sense. I'll keep that in mind the next time they ask me to sign up for a TJ Maxx card and I turn it down again.

Jessica:

One is fine. 10, maybe not so much.

Morgan:

What recommendations do you have for people who have a low credit score and having a hard time getting approved? What can they do to remedy that?

Jessica:

I think the most important part is knowing what is on your history and making sure that all of it is correct and accurate. You can check your credit score once a year on annualcreditreport.com. You can view your history that is being reported.

Unfortunately delinquencies stay on your credit for about seven years before they fall off. The best thing you can do is keep your payment history current and moving forward. If you had one instance of a 30 day late payment that was a fluke, that’s okay. Continue to move forward and keep working on getting all of your payments in on time. We tend to see medical collections every so often. Sometimes it’s as simple that you didn’t realize you had an outstanding bill from your dentist office, so now the $100 bill is showing up as a medical collection. Call the provider to get it paid and then try to get it cleared off of your credit. Handling any situations like that timely will help you get back into a better spot.

Morgan:

I will definitely be keeping my calendar updated with monthly reminders that go off on the first of every month.

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Morgan:

How can someone prepare themselves before filling out a loan application? What homework can we give our listeners?

How to Prepare Themselves Before Filling out a Loan Application

Jessica:

Knowing what your credit history and if there are any blemishes is very important. Letting your lender know if you have something that will show up on your credit report and that you are working on getting it resolved is helpful so that they are not surprised when your credit is run. Knowing that you know your credit history and that we’re not surprised when we ask you about your credit really goes a long way with lenders.

I think you should also make sure you know what direction you're headed. You should be working on your goals for your operation and getting a well-organized business plan together. There’s a lot that could potentially go into a business plan.  I've seen business plans range from one to 20 pages. It really depends on what you're applying for and what type of operation you have of how in depth you need to be. Projections of income and expenses you are anticipating for your operation is a good example of that.  We can take a guess, but if you provide us with background, numbers, and a plan goes a long way to helping with your loan application process

Morgan:

Tailoring your plan to your individual experience, because not everyone is the same. It depends on the size, where you're located, and so many other factors.

Jessica:

Absolutely, yes. The more help we have from you, the easier it is for us to work through. We may not be giving you proper credit for something or factoring in everything, so having your input on that is really important. If you are setting up a business, make sure you can provide your federal tax ID number, prepared operating agreement and your ownership structure to your lender. Having all of that set up when you come in is very helpful.

Morgan:

When it’s time to meet with your loan officer for your actual meeting, what do you need to bring?

What to Bring to the Meeting with your Loan Officer

Jessica:

There's a lot of documents we ask for that sometimes can be overwhelming. I always say the more information we have, the better, because it helps to give the bigger picture of your plans. Sometimes it feels like we're asking a lot, but it's all to your benefit.  

We typically ask for income verifications, such as W2 statements or pay stubs if you have off-farm income. We may also may ask for financial statement items. We fill out a balance sheet with your application, which would be a statement of what you own and what you owe. We may also ask for associated verifications such as bank statements or retirement account statements. We also ask for copies of your driver license. We need to verify who you are and make sure that you do exist. If you're purchasing livestock or equipment, bring in the bill of sale. That can be really important especially for equipment, so that we have the year, make, model and serial number because we use that for our loan documentation. Getting that information upfront can help speed up the process.

Morgan:

This is someone’s first farm loan or the first time they are going through the process, what could someone expect now that they know what they need to bring?

If they were going through the process with Farm Credit, what does that look like?

The Loan Process with Farm Credit 

Jessica:

Typically we will ask for you to gather your financial documents to submit with your loan application. Depending on what type of loan you're applying for, we might have a different application for a different loan. We have a different residential application, then an application for equipment purchases. We'll ask for financial documents, such as your balance sheet, tax returns, and those other verifications. Once we have everything all together, we can formally submit your application.

When we submit an application, we are sending it to a group of underwriters or credit analysts that are looking at the financial trends, reviewing your credit score and making sure that we are making an appropriate decision for approving or denying the loan.

After your loan decision comes back, we start working on the other pieces of your loan such as appraisals, title insurance and working with attorneys. There’s a lot of other pieces that happen after the loan decision until you actually get the documents to sign and obtain the loan funding.

Morgan:

Once the loan is approved, what are some things to keep in mind?

Jessica:

From a loan officer perspective, something that can sometimes be a surprise is that it can take a lot of time to get some of those pieces together. We may not always have your loan documents and your funding ready to go right after that. For livestock or equipment, it may take a few days. It can take anywhere between 30 and 90 days after we have your loan decision to put all of the pieces together for a closing on land purchases. Having the background that it could take some time is helpful to know upfront, so you don’t feel like you are just waiting. It just does take time to get all of those pieces together.

Changes can sometimes happen outside of your control after we have that loan decision, so it’s important to have good communication with your lender. If we need to adjust your loan amount or your loan structure, let your lender know what's going on sooner rather than later. The sooner we know about something, the more options we have to help you.

After your loan is set up, we also want to make sure that you're making your payments on time. Even though we love talking to our customers, we don't want to call you every month checking in your payments. Set yourself up for success with making timely payments.

Thinking about the future on if you do plan to expand your operation or apply for loans later on is also important. Make sure you keep good records of your operation, so that you're well prepared to come in and apply for another loan. When we have an established operation, we typically will ask for current year to date income and expenses. If you already have that set up and you're keeping records updated, it might be as easy as printing that off from the computer or handing us your records. If you don't have any of that together, it takes a lot of time to pull all of your records and receipts together.

Morgan:

What about for the people where the answer is, "no, you can't be a Farm Credit borrower right now."

Jessica:

Even if you get a denial decision, make sure you ask your lender what you can do to improve and better your financial position so that you can work on those pieces and reapply. It takes time to build your credit history back up or to increase your financial position with cash savings. Ask your lender what brought about the final decision so that you have a good understanding and will be prepared for next time.  

Morgan:

I feel like that brings us back full circle to the very beginning, when we were talking about looking for a good lender, someone that communicates, and that you feel comfortable talking with.

Jessica:

Absolutely, because a denial, isn't always that we are turning you down and that we don't want to work with you. It just means that we’re not in the right position or it isn’t the right purchase for you. We always like to see people succeed and we want you to succeed.

We are not going to set you up for failure, so if we see on paper that something doesn't make sense, we’re not going to do it. We don’t want you to fail or not to have the ability to make loan payments. We want you to be successful and we want to work with you to get to that point.

Morgan:

I feel like everyone does a really good job of that at Farm Credit. As someone who hasn't worked with a lot of different lenders, everyone that I see in the office seems to take that very positive approach, and they want to see everyone succeed and be that helping hand.

Jessica:

Absolutely. It's not a closed door.

Morgan:

Exactly. One last question that we ask all of our podcast guests.

What do you advocate for in agriculture?

What do you Advocate for in Agriculture

Jessica:

In our current environment, I think making sure that you have a connection with the consumer, that you're telling your story of your farm operation, and that you're keeping the consumer in mind. We may not always have to agree with what a consumer wants or what they expect from the marketplace. You do have to make sure that you're keeping that in mind, because ultimately, you're serving people.

You want to make sure your product is viable and it is something that's wanted and needed in the marketplace. It's tough because I think a lot of people don't have the knowledge and the background of what farm operations truly consist of, so getting your message out there is really important so people have an insight into what you're doing and why you're doing it. Agriculture is such an important part of everything that we do, eat, breathe, and what we wear. Having personal insight is helpful to all of us.

Morgan:

Absolutely. We wouldn't be here without it.

Thank you so much for joining me today. I had a ton of fun. I learned a lot, especially as someone who hasn't gone through the loan process before, so thank you so much for sharing.

Jessica:

Thank you for having me.

Morgan:

Thank you all for tuning in.

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