Funding for beginners – Canadian Cattlemen
Preparing to meet with a banker for a loan can be a source of anxiety, especially if you are young, wanting to start a livestock business, and don’t have a lot of financial experience. Canadian breeders spoke to two experts on how to best equip yourself for success.
“First and foremost, I would like to hear about their experience in the industry,” says Melissa Reinhardt, Director of Business Development at Farm Credit Canada (FCC). “If they don’t have a lot of experience, I would like to know if they have a mentor or a family, or someone else who can help. “
In addition to having worked in the financial sector for over 10 years, Reinhardt has personal knowledge of the beef industry, having and her partner owning a commercial herd of 300 head of Simmental-Red Angus cattle near Red Deer, in Alberta.
Have a business plan
“If you just stepped off the street, you have to have a plan,” she says, noting that it doesn’t have to be an extremely complex document. “You need the basics – who you are, what you want to do, how it’s going to work and the numbers. “
Todd Andries agrees and says having a business plan isn’t only helpful when talking to financial institutions, it also helps make decisions throughout the year. Andries is Regional Vice President of Conexus Credit Union and is based in Saskatchewan.
“Financial institutions want to know how you’re going to manage risk – so know what’s best and worst and how you’re going to handle it,” he says, adding that this information should be in the business plan.
Know your numbers
You also need to know how much equity you will be investing in the business.
“You have to have some skin in the game – if we’re going to lend you money, we want to know: what are you willing to put on? Said Reinhardt.
“Most banks will need 10-20% equity,” she says. “If you don’t have this, maybe your parents or someone else can support you.”
Many times she says that the young potential producers are very enthusiastic and come looking for 100% loans. As she applauds the energy, she cautions that contestants need to be realistic.
She says FCC has several tools and templates on their site to help, including a guide to cash flow planning, which reviews money coming in and going out and whether there is a positive balance at the end of the day. the day.
For example, he says, if you haven’t had farm income for five years, you may qualify for 90 percent financing under the Canada Agricultural Loans Act (CALA) program. Basically, this is a government backed loan guarantee program in which if the loan is in default, Ottawa will bear most of the note.
He says it’s also a good idea to bring your tax returns to show your financial history and paint a picture of your year in business. If it is a cow-calf operation, what are the calving dates? When are you going to sell? Will you sell all at once or long distance heifers during the winter?
The image should also include such things as whether the land is leased or owned and whether the food will be grown on the farm or purchased elsewhere.
Answering these questions will ensure that payments can be structured correctly.
For young farmers, Andries also advises having access to family or mentors who can help them overcome the challenges and opportunities of starting a business.
“Sometimes that gets overlooked, but I think there is a lot to be said for having someone to lean on and help guide the production side of the operation,” he says.
Grow over time
“I usually advise them to buy cattle a few at a time, on a gradual basis,” says Reinhardt, adding that FCC has a bridging loan that pays out the money for up to five years, which helps reduce the burden. pressure.
She says they can also just make a direct seller purchase with parents or a neighbor.
Andries says growing too fast is a pitfall young farmers should avoid. He cautions against keeping too many replacement heifers to make up the herd, as this can seriously restrict income and cash flow.
“Growth has to happen over a reasonable amount of time,” he says. “An aggressive plan will make your cash flow difficult and you risk going overboard. “
“It’s very important to understand what the bank’s loan terms are,” says Andries.
Last November, Reinhardt gave a presentation on farm finance at a webinar sponsored by the Beef Cattle Research Council. In it, she presented to the public several ratios, one of which was the current ratio, which compares assets to liabilities and measures the producer’s ability to meet its financial obligations.
Basically, a current ratio greater than 1.5 is healthy. Between one and 1.5 could mean problems if market conditions deteriorate. A ratio less than one means there might be difficulty making payments, but if it’s too high, it may mean that the money isn’t working as hard as it could.
Andries also says livestock insurance is often a overlooked product. Participation in the Western Livestock Price Insurance Program is one way to lock in the price of livestock if market prices fall.
“It protects against inconvenience – and if you’re a young farmer, your balance sheet isn’t strong enough to absorb some of those one-time expenses,” he says. “I call it self-preservation, and making sure you’re there next year.”
“Pay your Telus bill on time, pay your Visa on time, so you can build a good credit rating,” she says.
FCC offers a start-up loan for youth ages 18 to 25 of up to $ 50,000. Reinhardt says it has performed well in terms of buying a few cattle and building up a credit history.
See your lender as a partner
“You have to find someone you can trust, someone who has your best interests in mind,” he says, adding that it’s a good idea to keep them up to date to stay on track. way.
He also says that if you don’t like what you hear, you can get a second opinion from another staff member or even another institution.
Reinhardt says it’s healthy to think of your lender as a partner in the business – and if you’re uncomfortable, there are plenty of lenders who might be a better fit.
What if you were refused?
“No banker will refuse you for no reason,” says Reinhardt. “If they refuse you, it’s because they don’t want to put you in a bad spot.”
Whether it’s increasing income, reducing debts, getting more equity, or any other issue, the lender can usually help you with a plan to get to where the loan can be. negotiated.
“We saw people that we had these difficult conversations with and they came back after six months or a year and fixed the issues,” says Andries. “They understand that they are in a better position to get the financing.