FFSC – Day 2 Session 2
Our second session was presented by Ron Homann with 1st Farm Credit Services on how to use the ratios and standards.
A first level loan may not require a balance sheet or income statements. If the “score” is high enough then a loan of up to $250k or $500k operating loan may be granted. Their history is good with these types of loans, but much of that is due to the current good Ag economy.
The next level of loan is scored plus balance sheet analysis. Looking for minimum 65% equity and 1:25 to 1 current ratio. These loans can be about twice the size of the first level.
Investor loan approval go through different analysis. These loans would be scored based upon income and up to $1 million level may have less analysis than amounts above that amount.
They use three primary ratios:
- Owner’s Equity
- Working Capital to Adjusted Gross Income
- Net Capital Debt Repayment Capacity %
These ratios includes adjustments for estimated equipment replacements and any working capital deficits. The capital debt repayment capacity is on non-land payments.
Probability of default is based on three weightings for solvency, liquidity and capacity with the highest weighting on capacity.
The larger commercial farmers use more operational leverage, i.e. cash rent versus the financial leverage of purchasing land.
Prefer to consolidate all companies where ownership is 50% or more. If ownership is between 20% to 50% a case by case basis on consolidation. Prefer fiscal year corporations if possible.
Livestock operators Current ratio will be adjusted for one month of current income and only four months of current portion of long-term debt. Crop production is shown normally, only livestock operators may be adjusted accordingly.
Prefer accrual statements on all operators. For new farmers will help them get to accrual for the get go.
Most loans are based on historicals, not projections other than changes in production units.
(Please note I am typing this on an IPad and please excuse any interesting grammatical mistakes. If you have ever typed on an IPad or IPhone, you know what I am talking about).
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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