Preparing for Your Operating Loan Request
Article By: Jenny Jereczek, Director of Ag and Commercial Banking
Each crop year begins with a plan and for many producers an operating line of credit that helps turn that plan into a crop. From an agricultural banker's perspective, the strongest credit requests are not necessarily those coming from farms with the highest yields or the most acres. They are the requests supported by accurate information, realistic assumptions, and a clear understanding of how the loan will be repaid.
Whether you are renewing an existing line or requesting additional credit, preparation can make the process more efficient and help your banker better understand your operation.
The Balance Sheet
An updated balance sheet is one of the most important pieces of information in an operating loan request. It is extremely important to account for all assets including inventory, prepaids, and accounts receivable, as well as all liabilities including account payable, line of credit balances, and term loans.
Crop inventory is often a significant current asset and an important source of repayment. Be sure to detail:
- The type and quantity of grain being held.
- Whether any portion has already been sold.
- Whether the inventory is pledged as collateral.
Use a reasonable market value as of the balance sheet date. If grain has already been contracted, the contract price may be appropriate for that portion of the inventory. Unpriced grain should generally be valued using a current local cash price, with consideration given to basis and potential quality discounts.
Accurate inventory reporting protects everyone involved. Overstated inventory can create an unrealistic picture of working capital and repayment capacity, while understated inventory may prevent your banker from seeing the full strength of the operation.
A complete balance sheet allows your banker to evaluate working capital, leverage, and changes in net worth from one year to the next.
The Projection
A crop projection, sometimes called a cash-flow budget, shows how much money the operation expects to spend, when funds will be needed, and how the operating line will be repaid.
The projection should include anticipated acres, expected yields, projected commodity prices, government payments, crop insurance coverage, and other sources of farm income. Expenses should account for seed, fertilizer, chemicals, fuel, repairs, crop insurance, land rent, labor, utilities, interest, and family living needs.
Use realistic yield and price assumptions. A projection based only on above-average yields and the highest possible market prices may look good on paper, but it does not provide a dependable plan. Historical production averages, crop insurance guarantees, and current market conditions are better starting points.
Crop Contracts and Marketing Information
Crop contracts help document expected revenue and demonstrate how price risk is being managed. Provide copies of forward contracts, hedge-to-arrive agreements, basis contracts, or other marketing commitments to your banker.
For each contract, your banker will want to understand:
- The commodity and quantity committed.
- The delivery period and location.
- The contract price or pricing formula.
- Whether the basis has been established.
- Any delivery, quality or production requirements.
- Whether an advance payment has been received.
Your marketing plan should also address unpriced production. You do not need to have every bushel sold before meeting with your banker, but you should be able to explain your pricing targets, expected delivery schedule, and approach to managing market risk.
Explain Changes from the Prior Year
Numbers are important, but the story behind the numbers is equally valuable. Tell your banker about significant changes in the operation, such as:
- Additional or lost rented acres.
- Changes in cash rent.
- Machinery purchases or trades.
- Expansion into a new enterprise.
- Changes in ownership or business structure.
- Higher family living expenses.
- Carryover losses or unpaid expenses.
- Major repairs or capital improvements.
- Changes in crop insurance coverage.
- Plans to refinance or restructure existing debt.
Surprises slow down the credit process. Early, open communication gives your banker more time to understand a challenge and evaluate possible solutions.
Know How Much You Need and When You Need It
An operating line should be based on the operation's projected borrowing needs rather than a rough estimate. Seed, fertilizer, and cash rent may create large funding needs early in the season, while crop sales or government payments may reduce the balance later.A monthly cash-flow projection can identify the expected peak borrowing amount and the timing of advances and repayments. It also helps determine whether the requested line provides enough flexibility for normal cost changes or unexpected expenses.
Discuss planned machinery purchases, real estate improvements, or other long-term investments separately. Financing long-term assets with short-term operating debt can strain working capital and make annual repayment more difficult.
View the Annual Review as a Planning Opportunity
The operating loan renewal should be more than a paperwork requirement. It is an opportunity to review the operation's financial direction, discuss risks, and make informed decisions before significant expenses are incurred.
The best producer-banker relationships are built on communication, accuracy, and trust. When your banker understands your operation, its strengths, risks and goals, the conversation can move beyond simply renewing a line of credit and toward building a financial plan that supports the farm for years to come.
Jenny Jereczek is the director of ag and commercial banking for Security Financial Bank. She has expertise in several government lending programs, including Farm Service Agency (for which SFB is a Preferred Lender), SBA, WHEDA, and USDA programs, and is licensed to sell crop insurance including multi-peril crop, and crop-hail insurance. To reach Jenny, call 715-672-2427 or email jjereczek@sfbank.com.
