As a young, beginning, or small farmer, how can you position yourself for success when seeking to work with a lender to grow your farming operation? The Five Cs of Credit are a steppingstone to get you there! Dive into what each of these “Cs” mean, and how a better understanding of each of them can help you along the way as you grow your business.
Character
The more information you can provide to your lender up front about yourself and your business, the better! Share with your lender who you are, your background, and what your business goals and aspirations are. Even if you don’t have every detail of your business plan worked out, sharing as much as you can about your goals for your business will go a long way in helping your lender get to know you.
Inviting your financial services officer to your farm is a great opportunity for them to learn more about you and your business. It will help strengthen your relationship with your lender.
Capital
Capital gives your lender a snapshot of your personal financial statement, better known as a balance sheet. A balance sheet is a list of all your assets and liabilities — what you currently own and what you owe on. If you don’t have a balance sheet completed, don’t hesitate to ask your financial services officer to walk you through filling it out. We’re here as a resource and would be more than happy to assist you in learning how to complete it.
Your lender will also evaluate if you have more assets than liabilities. If not, it is important to communicate with your lender what your debt management strategy is going forward.
Capacity
Your ability and plan to repay debt is your capacity. This can include any existing debt as well as any new debt you are planning on taking on. Providing your lender with your plan for managing your debt will go a long way. If you can provide projections for multiple scenarios to your lender on your debt repayment plan, that is even better.
This will help them get an idea of your management abilities and show them you are willing to go the extra mile to provide the most information possible to your lender. Again, the more information you can provide up front, the smoother the lending process will be, the stronger the relationship will be with your lender, and the more your lender will be able to support you!
Collateral
Collateral acts as a secondary source of repayment and is required with every loan you are applying for with GreenStone. If you do not have a lot of assets that could be used as collateral for your loan, it will be important to have a cash down payment up front. The more you can put down as a down payment, the less you will have to use as collateral.
It’s important to remember that any collateral you use towards your loan must be a tangible asset and have some relation to your loan. For example, if you are taking out a loan for a new piece of equipment, you might be able to use equipment you already own as collateral.
Conditions
Conditions are the terms of your loan that keep both you and your lender accountable to each other. A condition of your loan may be that your lender requires a balance sheet every year throughout the length of the loan to monitor the progress you’ve made and to make sure you are on track for full loan repayment. Think of it as a way to check in with your lender and keep an open line of communication. We want to know how we can continue to best support you!
The Five Cs of credit are a framework meant to work together to present a full picture of yourself and your business plan to your lender so they can assess a loan solution that works best for you. Understanding each and why they are important will prepare you for conversations with your lender about the plans you have to grow your business. Your local GreenStone branch is available to answer any questions you might have on the Five Cs of Credit or what your lender is looking for when applying for a loan.
This article was originally published in Michigan Farm News.
