What advice would you have for a low-equity young producer either launching or growing their business? This was a question from a group of 34 lenders representing nine states in our Farm Credit University blended course which includes online and face-to-face training. Dr. Alex White from Virginia Tech and I tag-teamed this challenge with rapid fire responses.
First, we are in consensus as professors that good record systems are critical. This includes separating business and personal expenses to ascertain the cost of production. It was suggested that enterprise analysis is critical for more diversified types of operations. It is important to know which enterprises are most profitable so time and money can be allocated efficiently.
Another important point is to know your credit score and check your credit report. It is also important for spouses and business partners to check their reports, especially if they may be signing on a loan with you. Much discussion centered on what is a good score. Try to maintain a credit score of 700 or greater. To increase your credit score, pay your bills on time and only utilize approximately 15% of your maximum available credit. Be careful of canceling all your credit cards as it will lower your credit score. It may be best to keep the credit card you have had longest, since length of credit history is a component that factors into the analysis.
An additional way to provide evidence of creditworthiness is to develop a written business plan “lite” including written goals, production plans, operational plans, financial scenarios and marketing and risk management plans. Some business plan “lite” documents can be as concise as five pages excluding spreadsheets and exhibits. While a business plan does not guarantee success, your plan can be used as a tool to monitor your progress as you move your business forward, and can be a communication tool to use with your lender and suppliers regarding your past accomplishments and future aspirations.
A way young producers with low equity can get a competitive advantage is to develop a personal family living budget. Today, the average farm family living cost is $100,000 for a farm family of four. However, the difference between the low one-third and the high one-third of producers is over $60,000. This is a considerable amount of cash flow that could be utilized for growth and debt service. While one does not have to live like a pauper, frugal living and some sacrifice is often essential in operating a successful business. Remember it is a matter of priorities.
Next time, I will cover more suggestions for low-equity young producers.