What are banks looking at when you apply for loans?

[charliep]

A strange question for a Sunday. Do you get the sense your bankers/other lenders are making loan decisions to give farmers credit based on cash-flow/ability to pay (another way of saying adding to profit potential)? Or is there biggest concern security/your equity in your business?

[farmaholic]

My wife's "assets".....

[farmaholic]

If I was lending the money, I would be more concerned about the borrower's profitability and cash flow than the equity. You could always lend more if the equity position is high enough but I hardly think it's the lender's goal to own the assets in the end. In Ag, some lenders have been there done that. Borrow from the Credit Unions, they like to be over secured and cover their asses. If they don't think you'll make it you're probably good to go!!

[Oliver88]

I would say both.
They need to see that you have the potential profit and they also need a contingency plan to seize assets if you don't pull through.

FCC had to deal with fiscally irresponsible managers in the past so likely don't want to travel down that path again.

[wilagro]

They are looking for your carotid artery so they can get their teeth into you and suck out your lifeblood should you default.
Ahahahahhhaaahhaha

[gustgd]

Security

That being said, management ability gets you better rates

If you show up with a shoebox and no plan expect to get treated poorly.

[freewheat]

Dad's land, wife's job.

[charliep]

I should explain why I ask. The current situation reminds me too much of the early 1980's.

Good times/profitability followed by a years of poor profitability/rising interest rates.

Declining land values/losses in farm owner equity.

Banks that got scared/tightened up their lending requirements.

The start of many crashes including the crash of the 1980's and the housing crisis of late 2000's is lenders who just worried about security and not about ability to pay.

The other comment about what may lie ahead is the best protection is a really solid balance sheet and if you include inflation, net worth statement.

[wmoebis]

I wonder if there are the savings accounts around, of the magnitude that got used up in the early 80"s, in order to save the farms.
I think it forced a lot of older farmers to re enter farming or to hang on a lot longer than they wanted. Maybe we are still seeing effects.

Would/could it happen again?

[Partners]

Most banks don't care if you ever pay the loan back...just as long as you can pay the yearly interest...Its like the credit card with only a $10.00 monthly payment..for a 25 yrs. though..

[macdon02]

Just heard the comment this week that corn belt banks thinking 25% of farms won't cash flow current prices. Since May 9 they are looking at a $400/ac slash in gross revenue. Most yields are too high to trigger revenue insurance claims. Lots of pain coming

[farmaholic]

I've preached about a correction in land prices. I never bought any of the real expensive(realitive to?) stuff. I don't want to see it but what were going through now may just be the opening act for the main show. The stuff couldn't pay for itself as it was, now with poor quality and quantity and prices, the stuff that was supposed to subsidize it isn't as profitable either. If things don't improve I think we are in for some interesting times ahead. Unless there was a pile of money put down when it was purchased or the infamous off farm income to subsidize it, yikes. Hope no one bit off more than they can chew.

[farmaholic]

Disclaimer: not everyone has had production problems either.

[hobbyfrmr]

They do want you to list every asset possible, including wife's income tax/job. I went with 20% down and they take the mortgaged property as security. Then, there is the added bonus, where they "allow" interest only payment 9 times in 25 years.
There are huge war chests on farms after the last 4 years. Money is spilling out of (some) farmers bank accounts like it was 25 years ago. Land is selling for a minimum of $2500.00/ acre and going up. If a person started farming 4-5 years ago and had decent yeilds, they have only ever had to manage profits and income tax problems. There has been a lot of sweet profits for farmers in the recent past, hopefully this is just a correction in grain prices, or the market taking a "breather" from the last couple years' volatility. Only grain farmers like high grain prices, the higher price to farmer means less profits for everyone else up the chain. That can't last for very long.

[mbdog]

they look at both no doubt. And what a person thinks his equity is worth is not what the bank views it at. I ask about/and try and understand the different ratios they calculate/use to determine credit worthiness.
The skyrocketing interest rate scenario of the past would cripple not only the farm but the broader economy. Don't think this is in the cards... but debt associated with asset bubbles like steel and some land is something I've worried about for some time. You can bet, banks with their data and forecasters, and who have liens on your assets are factoring in debt to equity greater than you think, and stricter credit will be an issue going forward.
my 2 cents.