The farming world is pretty competitive. That part is true for all farmers. But young farmers face some additional challenges as they build their operations. It's especially true in a cycle like we're in with its increased costs and volatile markets. The risks and rewards are simply greater.
Young farmers just getting into the business of farming typically haven't been able to build a lot of equity yet. They're still investing heavily into their operations and those investments usually don't increase their equity.
Because of that, banks have more at risk with young farmer clients. So they want to have a clear idea of whether the young farmer can manage working capital effectively. A young farmer will want to maintain a higher level of working capital if possible. When you're more highly leveraged, you want more cash to be available if you need it.
Banks look at a couple areas when they're evaluating a young farmer for a loan. First, they want to see a cash flow plan. The plan should include scenarios with different prices and yields. That makes the banker more confident as the farmer has a plan for what he would do in different situations.
Also, banks can't get as much financial information about a young farmer. There's just less financial history available about a younger person. So they look at anything in your financial history – like credit scores and any personal debt. It's important that these areas are in order and that you know what's out there about you.
A poor credit score can become a red flag, especially if there's no co-signer for the loan. To the bank, a bad credit score means that farmer is a higher than average risk. That can negatively affect your ability to get credit for the farm.
A good credit score tells the bank something about you, too. If you've managed money well in your personal life, they may assume you'll do a good job with the farm's finances – and have more confidence in you as a result.
If you're a young farmer with a less than perfect credit score, you will want to have an explanation ready for your banker if he brings it up. Show him that you now see the errors you made with money in the past. Explain what you're doing now to change that and deal with money responsibly.
Young farmers face a particularly competitive landscape. Proactive financial planning is one of the best things you can do to set yourself apart and show your banker that you have a strong grasp of the numbers.
The stronger your financial history, the better. It helps you build a case about why you're a strong candidate for credit. Find out your credit score and plan accordingly for any questions. Consider your cash flow as you create a plan to present to your banker. Show him how it will work and how your operation will be successful and profitable.