What to know before you meet with a loan officer
The borrower-lender relationship is a two-lane road. Both parties have mutual goals. Both want to ensure the long-term viability of their businesses. And both have high expectations for one another.
So how do we make sure everyone is on the same page?
Clear communication and being prepared at each step of the process.
How to choose a loan officer and lender
When preparing to work with a lender, know that there’s more to the deal than just interest rate. From the first time you make contact with them, you should also actively be evaluating the lender and loan officer based on the following characteristics:
1. SKILLS & QUALITIES
- Do they have a stake in your industry?
- Are they forward thinking or looking back?
- Are they involved in agricultural events?
- Do they understand your business and the risks?
- Are they asking the right questions to get to know your business?
- What are the characteristics of their current borrowers?
2. CAPACITY
- Are they able to meet current and future borrowing needs?
- What are the lender’s limitations?
- Will they grow with you and your business?
- You work when the sun shines – will they come out to the farm to meet you?
3. PRODUCTS & SERVICES
- Do they take a cookie-cutter or a customized approach?
- Do they have competitive rates?
- Do they offer flexible terms?
- What are the offered conditions for the loan?
- What services do they have beyond loan products?
- Are there special lending options for young, beginning, and small farmers?
4. PEOPLE & LENDING PHILOSOPHY
- Do they take a team approach to loan services?
- Is this lender transactional vs. having a long-term relationship?
- Do they offer stability in a changing environment?
- Will you have access to the decision-maker?
- Do they have industry knowledge?
- Do they give you the ability to evaluate options and alternatives?
- Do they value confidentiality and ethics?
- Timeliness and convenience for your schedule
5. LONG-TERM PRESENCE IN AGRICULTURE
- Will they walk the walk, and give support during prosperous and challenging times?
- Are they committed to the industry and its people?
- What is the financial health of the institution?
- What is their investment in customers?
It may seem like a lot to think about, but doing due diligence before you sign any paperwork will pay off in the end. Loans are a long-term commitment, so you should be sure that you want to work with this lender or loan officer well into the future.
Things a Loan Officer will look for when applying for a loan
As you might expect, the loan officer will also be assessing many different characteristics about you; after all, it is their job to make good lending decisions for the good of the company. Here are some things a loan officer will look for when considering your application for a loan:
1. FINANCIAL INFORMATION & DOCUMENTATION
- Balance sheet – Assets, liabilities and monthly payments
- Income statement
- Cash flow projections
- 3 Years of Tax Returns – individual and corporate (when applicable)
2. WRITTEN BUSINESS PLAN (IF APPLICABLE)
Don’t worry – we’ve created the perfect guide of everything to include in your farm business plan.
3. PERSONAL CONSUMER CREDIT CHECK
- Verifies balance sheet information
- Credit history
4. FICO CREDIT SCORE
- Range from 300’s to 850’s
- Factors that impact credit score (types of credit, payment history, amounts owed, length of credit history, new credit requests) - Want to improve yours? Learn how to improve your credit score here.
5. PERSONAL CHARACTERISTICS
- Honesty and ethics
- Open and regular communication
The most common mistakes you can make getting a loan
Everyone always wonders about what major mistakes or situations to avoid when dealing with a lender. If you are a beginning borrower, here are a few to keep in mind:
- Running before you learn to walk.
You may not have gotten a loan before but you’ve done your research and you know exactly what kind of loan you need, how much and what your interest rate should be. Slow down! Share your new knowledge with your loan officer and be open to their suggestions. Experience sometimes says more than the math looks, so hear them out.
- 0% Financing trap
If it sounds too good to be true, it probably is. Read the fine print, and then read it again. These zero percent financing programs usually come with a minimum required amount, a hefty interest rate and some tricky stipulations.
- “I need money yesterday.”
Don’t wait until the last minute – this applies to both applying for a loan and talking to your lender about current loans. Submitting, reviewing and processing a loan application takes time. Being proactive will help you set more realistic expectations and give you time to be deliberate about what you need.
- Overvalue assets by >10%
Everybody in business should think about their “exit plan.” A loan officer evaluates both your debt repayment ability and your equity in the business to provide protection to both you as a borrower and the lender. If you overstate your assets and face adversity or have a life change that results in your desire to exit the business, you may have fewer options when working with your lender or have fewer assets to rely upon during that life transition.
- Fail to identify all liabilities.
A loan officer will make recommendations on loan structure and repayment terms based on your expected cash flow. If you do not identify all of your liabilities and repayment obligations, your loan officer will not be able to provide you with the best recommendations to fit your unique needs.
- Rate shopping
If you’re only in it for the rate, you could be signing yourself up to work with a lender that doesn’t completely understand your operation or doesn’t understand agriculture. Agriculture is a cyclical industry. Pricing and output levels aren’t guaranteed, so if a shiny low interest rate is all your lender cares about providing, you could be in a world of trouble if the market turns.
Setting realistic expectations can be difficult in our industry, but when you know what your lender is looking for in a loan applicant, the task becomes much easier.
Agriculture isn’t just an industry, it’s a way of life. We love what we do and we want others to love it just as much. When it comes to getting a loan for your ag operation, preparation is key to showing others the viability in your dream operation.