Cultivating SuccessHow to Prepare for your Lender

February 7th, 2019

Contact Informationwww.northwestfcs.com

Northwest Farm Credit ServicesJess Sarsfield

AgVision Specialistjess.sarsfield@northwestfcs.com

360-391-7780

Who is Northwest FCS

Northwest Farm Credit Services supports agriculture and rural communities with reliable, consistent credit and

financial services, today and tomorrow.

Part of the Farm Credit System Farmer-owned lending cooperative Servicing Washington, Oregon, Idaho, Montana & Alaska Over 600 employees and 46 Offices Providing over $13 billion in loan volume to over 20,000

producers Leading as the largest crop insurance provider in the

Northwest Financing 32% of the value of farm production in our

territory

Who is Northwest FCS

Northwest FCS Locations

Lending Programs Loan Programs Real Estate purchase Operating expenses Livestock and equipment purchases Refinancing existing debt

We also provide leasing services and life, mortgage, and disability insurance

AgVision Program We offer a specialized program called AgVision A program designed to meet the needs of customers

with at least one of the following characteristics: Young (35 years of age or younger) Beginning (10 years or less agricultural

experience) Small (Producer with annual gross farm production

of less than $350,000)

AgVision Program Less restrictive underwriting standards No minimum or maximum loan amount Reduced or waived fees Educational benefits including a 3-day conference in

Spokane Reimbursement up to $1,500 for technology

purchases and education expenses

JumpStart™ Loans Customers can borrow up to $100,000 with a JumpStart loan that

may be used for: Down payments Annual operating expenses Purchase capital items

Interest-only payments for five years and then loan matures or is refinanced to a more conventional loan.

Eligibility: Same as AgVision requirements And Solid business plan One year relevant management experience Operation in the start-up phase

RateWise™ Program Rewards young, beginning and small

producers for continuing management education with interest rate reductions on new loans

Participants can earn rate reductions of 0.25%, 0.50% and 0.75% for three years

Credits earned for in-person programs offered by our BMC/KC, universities, industry groups and FSA

Register at northwestfcs.com/RateWise

Note: terms and conditions apply

AgVision Partners/Tools We work and partner with government agencies Farm Service Agency (FSA)

FSA Guarantee: 90% This reduces risk when collateral position is weak, which is common with our AgVision

customers

FSA Down Payment Program (5-45-50) The borrower brings a 5% down payment, the FSA finances 45% and Northwest

FCS finances 50%.

Northwest required to issue a 30 year note

Washington State Housing Beginning Farmer Program Bond Loan program Payment Assistance Program (PAL)

How are Loan Decisions Made?

The 5 C’s of Credit

Character – Management skills and credit history Capital – What you own and owe Capacity – Can you repay the loan Collateral – Security that backs up the loan Conditions – Terms of the loan *Most lenders use this method or a similar method to

analyze commercial loan applications

Character Your experience in the operation

Operating/Production Financial Marketing

Have a business plan in place Have a good credit score

Your Business….Start With the End in Mind

What are your goals? How will you measure

accomplishments? Does your team understand

your vision for the future?

Business Plan General

Name Date Production year

Financial Current year income and expense records Current balance sheet Projected cash flow budget Previous tax returns

Farm Plan Land-base -- list each tract, total acres, location, include owned and leased Number of acres and crops to be grown on each tract, yield, estimated price per

unit Livestock -- list total number by classification (cows, bulls, etc.) List number of

head to be produced, estimate pounds and price per head for sale Marketing plan including when and how products will be marketed

Business Plan (continued)

Risk Philosophy Insurance – do you have Life or Health insurance Crop Insurance - crop hail, multi-peril

Expansion Plans Plans to purchase real estate. Plans to lease additional ground. Plan to purchase equipment

Personal Experience Goals – list short-term and long-term

Credit Report

What is a credit score and why is it important Predicts financial risk over time Credit scoring is used by lenders, insurers, and others to

evaluate your credit behavior Credit Score above 650 Have no late payments Have low credit card balances Have no outstanding collections, bankruptcy, foreclosure Review your credit report at least once a year

www.annualcreditreport.com

How Do I Rate?

Different models have different ranges Credit Scores typically range between 301 to 850

Excellent Credit: 781- 850Good Credit: 661-780Poor Credit: 601-660Bad Credit: Below 600

Credit Bureau Reports Over 60% of FICO scores exceed the magic

number of 700 –WHY MAGIC

Above 800 – less than 1% delinquency rate Above 700 – less than 5% delinquency rate Under 600 – 51% delinquency rate Under 550 – 71% delinquency rate

Capital Your financial position – what you own and what you

owe Financial Statement: Balance Sheet

Balance Sheet What is the balance sheet?

Statement of financial position Specific point in time (snapshot) Inventory of Profit or Losses Impact

Components of the Balance Sheet Assets LiabilitiesOwner’s equity (net worth)

Balance Sheet: Assets Anything owned by the entity which has a dollar

value. Current Assets

Can be converted to cash within 12 months (without disrupting normal business operations)

Examples: Cash, savings, marketable securities, A/R, cash investment in growing crops, prepaid expenses, etc.

Non-Current Assets Assets to be held for longer than 12 months Examples: Real estate, retirement accounts, equipment, breeding

livestock, etc.

Balance Sheet: Liabilities All debts of the business owed to:

Creditors Suppliers Any other person or institution

Current Liabilities Obligations due and payable within 12 months Examples: Accounts payables, operating loans, principal portion of

term loans due in 12 months, etc. Non-Current Liabilities

Obligations due and payable after 12 months Examples: Real estate loans, equipment loans, etc.

Question: How is credit card debt classified?

Balance Sheet: Owner’s Equity Owner’s Equity: The portion of assets owned free-and-

clear by shareholders Also known as Net Worth

How is an individual’s net worth calculated? Same for companies and organizations

Assets $100,000Liabilities $25,000Net Worth $75,000

Owner's Equity = Total Assets - Total Liabilities

Balance Sheet: AnalysisRatios and benchmarks help producers:

Set goals Make decisions Compare performance to similar operations

Lenders and other creditors can use the same information to evaluate credit risk

Balance Sheet: Analysis

Top half of balance sheet is primary source of operating funds

Do not want to rely on sale of non-current assets to fund operations

Shock Absorber

Another way to analyze the top half of the Balance Sheet

Working Capital = Current Assets - Current Liabilities

Current LiabilitiesCurrent Assets

Current Ratio =

Balance Sheet: Analysis

Proportion of assets financed by debt Example: 30% Debt to Asset Ratio

30% of your assets are owned by others What is a ‘good’ Debt to Asset Ratio?

Total AssetsTotal Liabilities

Debt to Asset Ratio =

CapacityIt’s one of the most important factors for any operation Financial Statements:

Cash Flow Budget (the plan) Monthly projection of cash flow (Revenue) and cash flow outflows

(Expenses) over a given period (usually one year) Serves as a guide for the operating year Identifies need for operating financing to cover cash flow deficits

Income Statement (the reality) Profits and losses

Revenues minus expenses over an accounting period (usually one year) Measures:

Profitability Loan repayment Expansion potential Income tax payments

Collateral The security that backs up the loan Examples: farm ground, farm equipment, crop inventories,

livestock, etc. Match collateral with type of loan Operating loan – crops Equipment loan – machinery & equipment Real Estate loan – farm ground being purchased

Generally, a lender would like to be below 80% Loan Amount/Collateral Value

Conditions Structure of the loan Term = length of loan Rate = fixed, variable, or combination interest rates Repayment schedule = monthly, semi-annual, annual Liable Parties = borrowers, co-signers, or guarantors

FSA guarantee Covenants = crop insurance, life insurance, collateral

monitoring reports, capital purchase restrictions, etc. If there is weakness in the other C’s, conditions can be

used to mitigate the risk to Northwest FCS and customer

Questions?