If you’re getting ready to apply for a loan, there are some key factors that are important to know that could help you get your loan approved. If you’ve already applied for a loan and you have been denied, do not worry, you can always make adjustments and apply again. It’s not unusual to shop around for the best funding options for you. In fact there are some really great, non-traditional programs out there for agriculture loans, like the CAFL Program. Here are a few common reasons loans are denied.
Every lender is different, and each loan applicant is different. Different banks have different requirements. There are lots of reasons a business loan could get rejected and it doesn’t mean your lender doesn’t understand you, or your idea, or they don’t trust you. As an applicant, you need to be prepared and do your homework on the bank you are working with and know what their requirements are. If you do get rejected, knowing why you were declined is good information to have and can help you make adjustments before you apply again, or look for other options.
Carefully review your financial documents and make sure you have met all the requirements. If you don’t meet some of the requirements of a particular financial institution, you may want to look at other prospective lenders. The CAFL Program, for example, supports agriculture businesses including farmers, ranchers, and other businesses that relate to agriculture like processors, even if you don’t have a strong credit record. If you have the experience, desire, and work ethic, and you can show a thought out business plan,financials, and other required documentation, you could still get approved at a low, fixed 4.17% APR through the CAFL Program.
For better or for worse, a credit score is a widely accepted way to evaluate an applicant. Lenders look at your credit score as well as personal credit, revenue, time in business, or a combination of these and other factors to assess the risk of making a loan. Essentially, a lender needs to be sure you will be able to pay back the loan. The best way to know whether you can pay back a loan, is to look at if you have paid back a loan before, and how much debt you are currently carrying. So if you made some mistakes or had challenges in past years that you are still paying for now, this could affect your ability to get a loan today. It doesn’t seem fair at times, but it is the nature of the industry. If you have a low credit score, or a lack of credit history, try to pay off any debt you have, and establish a good credit history. One way to do this is by using a credit card and paying off the balance every month. Or, you can look at funding options that will work with you to build your credit-worthiness, such as the CAFL Program.
This is a really important part of the process, especially if this is a young or new business, if you do not have a lot of experience in agriculture, or if you do not have a strong credit history or credit score. The business plan is where you can build your case for your agriculture business and prove that you are capable of running and growing your ag business, and you have a solid plan for paying back the funds that are loaned to you. The CAFL Business Plan Builder has prompts and questions that will help you define your plan and think through the details of your financial projections. Lenders need to weigh the risk of lending to you, and a robust business plan can make a big difference. The business plan doesn’t need to be formal and you don’t need a business degree to write one. It’s simply a plan that tells the story of your business. At its best, it demonstrates that you understand your customers, products, means of production, and market trends. It’s your chance to show off your great idea and business smarts!
You have to show that you are willing, able, and eager to do the work. This starts with taking the time to complete the entire application, and give it your complete attention. If your application is sloppy or incomplete, a lender could think this is how you would operate your business as well, and may have second thoughts about approving you for a loan. Your business loan application is only as good as your documentation and eye for detail. A common reason for loan rejection is due to deficient or incomplete applications that fail to provide all of the requested information and documentation. Your documentation is used to determine whether you’ll be able to repay the loan. This is your chance to make a great first-impression.
If you’ve never pulled your business credit report before, you may not even be aware your business has an assigned code that tells lender, vendors, and creditors what industry your company falls in. Some lenders consider entire industries too high risk for lending. Your NAICS or SIC code may be the reason your business loan application was rejected. If you’re in the agriculture industry, and you think this could be why your loan application was rejected, then you should definitely look into the CAFL Program. The CAFL program is designed for agriculture businesses and you will not be deemed as “too risky” simply for being in agriculture.
When you get approved for a secured business loan, the lender will often file a lien with your state’s Secretary of State to protect their investment. This doesn’t mean they are actively coming after the assets to recoup repayment, but it gives them the right to reclaim the assets if you default on the loan. It’s a way of ensuring they are at the “front of the line” if you have other debt collectors coming after your assets as well. Some lenders will not lend to you unless they are the only or “first-in-line” lender with a UCC filing on your business. The problem can pop up from time to time when a lender on a loan that’s paid in full forgets to remove the lien filing. This is surprisingly common, and not-surprisingly very annoying. It can take six weeks or more to have a UCC filing removed, so check your UCC filings now if you don’t already know what they are.
A Nav survey found that 70 percent of business owners without a business bank account had been rejected for a loan in the past two years. A business checking account is relatively simple to set up. It keeps your personal and business finances separate which protects you and your business, and helps give a lender a clear view of your operations. It can be hard for a lender to judge monthly and annual revenues, cash flow, and obligations from a checking account that also shows personal expenses and payments. It’s confusing and creates extra work for the lender to figure out which is which—extra work a lender will not take the time to do. It also helps establish a history for your business so a lender can see how long you have been in business, and “time in business” is a common underwriting factor for business loans. If your business loan is denied for this reason there’s a pretty simple solution — set one up! Having a business account, and diligently using it, also benefits you in the same way it does the lender. Clear records result in good business intelligence and better decisions. There are plenty of low-cost options out there and a business bank account will make your bookkeeping and taxes easier to manage as well.
It’s true, applying for a business loan can be a time-consuming pain in the you know what. We don’t want the process to overwhelm you, and we don’t want you to be denied a loan and be disappointed either! We hope this serves as a guide before, during, and after your loan process, to make it less painful and maybe even save you from unnecessary rejection. If you are rejected, don’t be discouraged! It doesn’t mean the end of your farming or ranching dreams! Just because one lender denies your application does not mean you won’t get approval from another. The CAFL Program was set up specifically to support those in the agriculture business who would not qualify by traditional lending standards. If you think it could be right for you, call us at 303-869-9021.
If you’ve been running your own ag business for years and years and years the topic of “funding” may not sound very exciting to you. Even newcomers may not want to think about funding. Despite its name, funding is often not very fun. However, whether you are a long-time expert or you’re just jumping in for the first time, it’s helpful to review some of the fundamentals of funding.
It’s hard not to constantly think about your new or growing business. The sense of independence and ability to control your own future is a powerful motivator. And, really, what could go wrong? With your skills and drive, plus a healthy helping of wise decisions, and a bit of good fortune, you will be on your way to achieving your dream. Think of funding as the gas in your tank. Does it really matter what kind of gas you use? The answer is definitely yes, yes it does matter. Choosing the right funding at the right time is one of those decisions that can be crucial to the growth and success of your ag business.
Different types of funding come with different levels of, say, stress. Ideally, you’ll want to balance the level of funding stress against your level of business stress. For instance, a new business comes with plenty of business stress. Even if it is exciting, it is still a lot to handle. There are many unknown factors and plenty of thoughts to keep you up at night: What happens to my crops if it doesn’t rain? What if it rains too much? Will my potential customers actually place orders? Many of your worries are beyond your control at this stage, so if possible, you want your funding choices to be lower stress.
Before you look at where to get funding, consider how you can minimize the need for funding in the first place. This will make it easier to secure funding, because you can potentially ask for less, and you’ll have less to pay back.
Grants are a highly desirable option because it means you do not have to pay the money back. There are often a few hoops to jump through but if you can secure grant funding it’s worth the extra effort.
Is it possible to get short term loans from your suppliers? Yes, it is, and few people think about doing this. Simply asking for more beneficial payment terms is the equivalent of a short term loan. Payment term requests are often granted, especially if you have built trust and you have a good reputation with your suppliers. What are payment terms exactly? It means how long your supplier is giving you to pay for their goods or services. If the terms are NET 30 or NET 60 for example, this means your supplier is giving you a 30 or 60 day loan. Paying a month or two after you receive goods or services gives you more time to collect cash from your own customers so you can pay your obligations. Your cash flow benefits tremendously when you collect money from your customers upon delivery and pay your bills 30-60 days after delivery. With cash-in-hand it can be easy to forget that you owe some of it to your suppliers. Be sure to make good on those commitments by tracking them carefully.
Let’s talk about types of loans and main considerations. Here are the basic loan types:
Remember what it felt like as a kid when you had to borrow lunch money from a friend? Typically, that kid would relentlessly remind you until you paid them back. Debt can be like that. It’s always there in the back of your mind, or in your mailbox, or email, looming over you like a dark cloud. Debt, however, doesn’t have to feel like a constant burden, not if you have a good plan for paying it back (hoping you can pay it back is not a plan, you need an actual plan).
Whether grant money, donated money, or loaned money, the objective is the same: thoughtfully and purposefully invest your money in a way that generates additional revenue. Investments can include a broad range of spending including equipment, buildings, labor, inputs, livestock, or intellectual property. Any of these can be used to create value that your customers will recognize and pay you for. If you know how the investments will increase revenue, and stick to the plan, you can have a good degree of confidence that the increased revenue will be there to pay the debt.
Those who are good at managing debt often know the trends in their business, have experience that minimizes the challenges of production, and have learned how to predict future demand with a fair degree of accuracy. They also adhere to smart financial practices such as maintaining reserves to protect against unexpected events, keeping due dates in mind and staying on top of monthly payments, communicating regularly with their bankers (this builds trust, trust builds support), and prioritizing loan payments.
Securing funding is a necessary part of running most any business. For an ag business, in particular, it is a critical step for not just operations, but also for increasing revenue. The bright side is, once you do get your funding, it can be a cause for celebration! Take your time and do your homework. If you first reduce the amount you need, and then look for funding opportunities that will benefit you the most, and you have a realistic plan to pay back your loan, you’ll find there are quite a few avenues to take that could really provide the security and “gas in the tank” you need. And it may be more fun than you think.
Most small to medium-sized agricultural businesses will, at some point, need to get additional funding in order to grow. There are several ways to get financial support. For example you can leverage your savings, ask your friends and family for a loan or to invest, barter for services, keep a day job for a while longer, seek grant funding, or apply for a loan. A loan can be a great way to get cash flow, cover expenses, hire new employees, and make purchases to scale your businesses. However, on the down side, a loan can come with some qualification requirements that are tough to meet. If you decide getting a loan is the best option for you and your business, here are some things to keep in mind before you apply, to ensure your money and time don’t go to waste.
Instead of increasing your debt, a smart loan works for you. If you use the funds you receive from your loan to scale your business, you can increase your profit beyond the interest rate of the loan. For example, let’s say you use the funds loaned at 4% to buy cattle that you then sell at a 10%. That’s a 6% profit that goes into your pocket even after you pay off your loan. So rather than borrowing money hoping business gets better so you can pay it back, you invest in your own success and generate your own wealth.
Many lenders will ask you to detail how you’ll use the loan. To help your case with the bank, think through what you’ll use the funds for and find the loan that matches your needs. To do this effectively, first develop the best strategy to increase profits and grow your business, then pick the loan that fits your strategy. Do you need financing immediately to cover pressing costs like payroll or rent? Look for loans with a quick approval process and flexible business credit. If it’s truly a financial emergency, be prepared to explain your circumstances to your lender and show them your plan to get it under control. Do you need a large amount at once to buy equipment? Find a loan that lets you use that purchase as collateral, especially if you don’t have other assets.
With a commercial loan many lenders will need to know exactly how you will use the loan. Unlike a personal loan, which is repaid based on your actual income, a commercial loan is repaid based on your estimated increase in revenue or profits. The lender will expect you to use your loan funds according to what you describe in your plan. In fact, many lenders will require you to submit invoices to them for the items you want to purchase and they’ll transfer the funds directly to pay each specific invoice. That way, they are certain the money is being used as promised.
Your personal finances are not the same as your business finances and you should draw a hard line between them to separate them from each other. This lets you easily see your profit and loss, signals to lenders that it’s a legitimate business and not a hobby or side hustle, and keeps your tax returns straight-forward. Lenders will be looking into your financial history, past and projected sales, and other activities, as part of the approval process. You want to ensure they get a clean, clear picture of your business and not your personal life.
For better or for worse, your credit score indicates to lenders how good you are at managing your money, and how capable you are in paying your debts. Sometimes, though, life doesn’t go your way. You may fall on hard financial times and it doesn’t seem fair to be judged on your credit score alone. The CAFL Program takes this into consideration. It uses multiple indicators during the application process so a poor credit score is not an automatic hindrance. Still, it’s good to know where you stand because almost all lenders will want to know what your credit score is. Reporting agencies such as Dun & Bradstreet, TransUnion, and Equifax know your scores and are obligated to tell you what they are. If your credit score is low, you can pay down debt, including balances on your business and personal credit cards to improve your score and your chances of getting a loan approval. Using less than 30 percent of your credit limit, making sure you’re in good financial standing with suppliers, and catching up on past-due accounts, can also help boost your credit score. Remember, even if your score isn’t great, or if you don’t have any established credit, you can still apply for a loan through some programs such as our CAFL Program, which offers a low 4% fixed interest rate no matter your score.
Applying for a loan can feel like a job in itself. The application process takes effort. Lenders want to know that you are prepared to use the funds to build success and that you are making the best decision for your business. Taking on a loan means taking on debt and you will have to pay back more money than you borrow. Lenders need to feel confident that you will be able to grow your business to a point that paying back your loan will not be a problem. Unfortunately, applications are necessary—but your hard work will pay off!
When researching loan options, keep in mind you will be taking on debt, and that will cost something. Debt doesn’t have to be scary though, if you do some investigating. Watch out for advertised interest rates that do not include additional charges like origination fees and ongoing service fees. The annual percentage rate (APR) is the figure that tells you your total cost of a loan, including base interest and fees. Know exactly how much money you need, and don’t apply for excess. This can save you money in prepayment charges because even if you do not use the full loan amount, some lenders require you repay on a regular basis for the remainder of your repayment term. Another consideration is secured loans require collateral. Equipment loans or mortgages use the property itself as collateral while loans for other purchases are usually secured with a UCC-1 or “blanket” lien, which uses all your business assets as collateral. It can be painful and costly to replace your assets if they are repossessed. Some loans, including SBA loans, also require a personal guarantee, which means that personal assets are used as collateral too. The CAFL Program requires a personal guarantee, to share the risk, but has no prepayment fees if you pay off your loan early, and offers a low APR of 4.17%
The bottom line is, applying for a loan is a process, and it takes time. Isn’t the future of your agriculture business worth it? No matter what you decide, exploring all your options, and being prepared before you apply for a loan, will help keep things moving and bring you closer to growing your business, securing your financial stability, and achieving your dreams!