This website serves Farmers and Ranchers in the Kansas AgriTourism Industry.
Welcome to Kansas AgriTourism!
This website has been developed specifically for Kansas farmers and ranchers involved in AgriTourism, rural properties where the traveler has an opportunity to experience farm and country life far from the hustle of the city.
the Kansas Agriculture Marketing Division and the Travel and Tourism Division of the Department of Commerce
and with financial assistance from Frontier Farm Credit.
We invite you to explore this website to find a variety of articles and resources that will help you succeed in agritourism.
If you have any questions, please contact the Department of Commerce, Travel and Tourism Division, and ask for the Agritourism Liaison.
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When You Must Borrow Money to Grow Your Business,
Part Five: The Five Credit Factors
As we are either starting or expanding our direct farm marketing businesses,
the inevitable dilemma occurs:
"I don't have enough capital to do it right. Should I borrow, or should I just start small?".
In order to consider lending your money for your new operation or expansion, the lending officer must request a great deal of information about your business. As we’ve outlined in this series, he or she will look at financial reports, balance sheets, owner’s equity, profit and loss statements, cash flow analyses, and your credit bureau report. (You can review these articles on the Kansas Agritourism website.)
The process of applying for a loan takes time, and only after you have developed a frank and open understanding between you and your loan officer will it become time for a decision. Dennis Lawson, the Financial Services Officer for Frontier Farm Credit who has given us the content for this series of articles, identifies 5 credit factors for making that decision.
Five Credit Factors:
- Character
- Capital
- Capacity
- Collateral
- Conditions
Those of us with family roots in the Kansas Plains appreciate that “Character” is still considered a major factor. Character, Dennis says, is the borrower’s willingness and determination to repay the loan, regardless of unforeseen adversity. Character includes such qualities as honesty, openness, integrity, and self-discipline. According to Dennis, character is often regarded as the most important credit factor, as a weakness here cannot be compensated for by the strengths of the other 4 C’s.
“Capital” analysis identifies the borrower’s financial position and reveals how much financial adversity the borrower can absorb. This analysis is based on the historic and current balance sheets, income statements, and changes in the business’s net worth and/or earnings.
“Capacity” is determined, based again on analysis, as to whether there is sufficient income to meet all farm and non-farm business operating expenses, related debt, and living expenses.
Capacity analysis identifies:
- Repayment ability
- Historic and projected cash flow (a sustainable cash flow is the primary source for loan repayments.)
- Earnings (repayment source for capital needs)
The personal property, real estate, and other items of value make up the “Collateral” that must be pledged to secure the loan. The collateral analysis also determines the appropriate loan closing procedures needed to ensure sufficient protection under applicable state statues. The collateral is, after all, an important secondary source to recover the loan value.
Collateral Analysis includes:
- Evaluation of the quality of the asset
- Determination of the value, title holder, and lien position
- Relationship of the loan to the collateral and/or to the net realizable value
- Stability of the collateral condition and value
- Marketability of the collateral
Finally, the loan “conditions” are evaluated:
- Are they constructive in amount and purpose
- Are they prudent and practical as to repayment terms for both the borrower and the lender
- Do they balance credit risks with effective loan controls
- Do they directly relate to the borrower’s cash flow, management skills, financial condition, and to the economic life of the project or asset being financed.
As we said in the beginning of this series, working with a lender begins, and continues, as an ongoing relationship with your lender. Candor is critical as you work together through this process, as is the trust you must have in the expertise and confidentiality of your loan officer. Likewise, he or she is considering your character, as well as the quality of your investment and the potential of your business venture.
We hope that this series has answered a few questions for you, and clarified some of the terminology and myths about the borrowing process. If you would like to know more obtaining a loan, see your local loan officer, or contact Dennis Lawson at Frontier Farm Credit, at 800-935-3081
When You Must Borrow Money, Part One- Selecting A Lender Who Shares Your Interests
When You Must Borrow Money, Part Two- Understanding Assets and Liabilities
When You Must Borrow Money, Part Three- The Income Statement and Cash Flow Analysis
When You Must Borrow Money, Part Four-Credit Bureau Report & How to Improve Your Credit Rating
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