By the Land Bank
In the first article of this 2-part series, we explored several common reasons that agricultural loans are frequently declined, including farmers’ eagerness to start too big, lack of security and weak balance sheets, insufficient repayment ability, lack of experience and mentorship, and poor financial literacy and bookkeeping.
While these issues present significant obstacles for many farmers seeking financing, there remain additional challenges that can frustrate approval chances. Gaining a well-rounded perspective of lender considerations can empower farmers to make improvements that will transform rejections into approvals.
In part 2 of this series, we take a deeper look at several other factors that influence loan decisions in the agricultural sector.
Poor deal packaging and incorrect information
Loans are often declined due to poorly packaged deals with incorrect information about yields and prices. It’s crucial to use accurate and current market data, including grain prices while accounting for risks. Ensure alignment with the bank’s pricing and adhere to a checklist during the screening process to avoid discrepancies and improve the quality of applications.
Lack of farming background
Some applicants seek to purchase farms without any prior farming experience, expecting to achieve the same yields as the previous owner. However, this expectation is often unrealistic without a solid background and experience. The “jockey” effect can lead to failure, as new owners may lack the necessary skills to replicate previous yields. Additionally, in other cases, expensive farm units may not reflect their true production capacity, causing misalignment between asking prices and productive value.
Misunderstanding grant requirements
Other applicants may want to get involved in farming due to the availability of grant money but fail to realize that they must first qualify for the loan component before any grants can be disbursed. This misunderstanding can lead to delays and complications in the funding process.
Inexperienced individuals, often without any farming background or professional qualifications, may be drawn to farming due to the allure of free money (grant portions). Unfortunately, many of these applicants lack an understanding of what they are getting involved in, which can lead to poor decision-making and financial losses.
Lack of proven concepts
Some applicants propose starting new enterprises without established concepts or prior experience. They seek financial support from banks without any evidence of personal investment or a proven business model. Applicants need to demonstrate commitment and progress before seeking bank financing, rather than relying on bank resources to fund untested ventures.
Restructuring or debt takeover challenges
There are challenges involved in restructuring or taking over the debts of loss-making businesses. These situations require careful assessment to determine the viability of the business post-restructuring. The bank must evaluate the potential for recovery and future profitability before proceeding.
Industry-specific challenges
Understanding the current state of the agricultural industry is critical. Conducting thorough market analysis and intelligence gathering is essential. If the risks within a particular industry are deemed high, proposals from that sector may be declined due to potential financial instability or the risks are not adequately mitigated.
Poor credit history
An applicant’s credit history plays a significant role in loan approval. Missed repayments, outstanding arrears, or judgments can severely impact the likelihood of securing financing. A thorough review of credit history is essential to gauge an applicant’s financial responsibility.
Inconsistent cash flow
Evaluating a business’s ability to make loan repayments requires a close examination of its cash flow. Inconsistent cash flow can raise red flags, making it critical to assess whether the business can meet payment obligations by the due date. Furthermore, unrealistic assumptions and figures not supported by industry market trends.
Conclusion
A successful loan application requires careful preparation and consideration of these factors. Understanding the expectations and requirements of the bank can significantly enhance the chances of approval. Applicants must be diligent in presenting accurate information, demonstrating experience, and showcasing financial viability to improve their prospects.
Compiled by the agricultural economics and advisory team at Land Bank.
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