1) Application Phase
Determine what you want and why. The amount, term and purpose of the loan will be essential to understanding the risks and cash flow burdens you will incur as well as for the lender to understand your needs. This may sound basic, but it is the most important and often times overlooked portion of the loan request process.
It’s okay to be a little unclear as to the right structure for the loan as this is a task that should be done in collaboration with a lender. The lender should work carefully with you to determine how the loan will work going forward and what it will be used for. Loans borrowed for one specific purpose and then used for another is the most frequent cause of stress and problems between ag borrowers and lenders.
2) Information Phase
During this phase, it is important that you be open with your lender. There are three areas you should be prepared to discuss:
- Copies of your last three years of tax returns and a current financial statement (balance sheet) with complete and full disclosure of all assets and liabilities
- A realistic value of your assets — Any exaggeration will make a negative impression of your approach to the borrowing process and financial matters.
- How your operation has changed over the last several years, as well as your expectations for the years ahead — A realistic valuation is one of the most significant aspects of a lender’s assessment of your financial and operational planning capabilities. If you have been through a difficult time period, be prepared to discuss this candidly and to share the causes and cures for these troubles.
3) Analysis Phase
Meet with more than one lender. This may allow for more options on loan terms, rates and structure. Be candid with the lenders in telling them that you are talking to more than one lender.
Ask the lender’s opinion on your loan request, financial strength and plans for the future. If the lender is vague or reluctant to share an opinion, you may need to speak with another bank. Whether their opinion is good or bad, a clear understanding of their thoughts on your financial situation and the direction you are headed is critical to your financial future with this lender. This conversation is one that many avoid because it can be stressful and awkward, but this is where you can receive the greatest value from a lender. This exchange will also provide insight as to the quality of the lender and financial institution you would be working with.
4) Decision Phase
Plan on learning from this experience. Whether the decision on your application is a yes or a no, you have the right to understand the reason and the rationale behind it.
- With a yes comes the requirement that you understand what the decision means to future operations and cash flow and whether or not it meets your initial needs.
- With a no comes the difficult but important personal understanding of why the decision was negative and how your operation needs to change so that it will be more credit worthy going forward (at least in the eyes of this particular lender).
In all borrowing discussions, the most important aspect is candor, both with you and with a lender. A realistic third party assessment of your operational and financial affairs can be a valuable insight that can only be gained through a candid and open discussion with knowledgeable people.
For more tips on securing loans, read our lender’s inside scoop.
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Mr. Watson serves as president of the UMB Agribusiness Division. He joined UMB in August of 2005 and has also served as the president of the UMB Kansas region. Watson is a graduate of Wabash College in Crawfordsville, Indiana with a major in Psychology. He has also attended The Colorado School of Banking, The National Commercial Lending School (where he has also been an instructor), and the Stonier Graduate School of Banking.
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