Growing numbers of family farms across Canada have started on the transition journey. They’re actively working at creating pathways that will give the next generation their shot at calling themselves farmers.
For tons of these hopeful farmers, though, there’s a big question. How can they become bankable?
Sure, Mom and Dad may think they are up to taking over the farm. But what about the lenders who are going to get called on to support the plan?
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“The earlier you involve your children in financial discussions about the farm, the better,” says Perry Wilson, vice-president of operations for Farm Credit Canada (FCC). He says each farming parent knows their own successor’s financial comfort level and situation best, but as a general rule, teaching good financial principles and practices to younger children tends to pay off.
“At the younger age, it’s as simple as teaching your children about saving versus spending, levels of risk investment, and conversations about how credit works and why it is an important tool of the farm business,” Wilson says. This level of engagement is what he describes as a “healthy practice” to enable the next generation to understand what they can expect when leading the financial discussion on behalf of the farm operations.
Many of the successors of family farms begin to have farm income and expenses before ownership, providing an opportunity to broach the financial discussion.
“Farming parents can work with their children to review the budget together prior to a farming season and then again afterward to compare projections and outcomes,” Wilson says. This is also where parents can provide a more fulsome snapshot of the farming finances. “Don’t forget to include real costs that parents may be ‘helping with’ such as gifted labour and equipment use. Understanding these true costs of farming shapes many decision-making habits and considerations.”
Preparing for ownership
As the successors prepare for ownership of the farm, there are several skills the incoming generation can begin to build to showcase their responsibility for ownership. FCC economist Craig Klemmer says most institutions recognize the assistance a young person needs to build a credit history and a financial background.
“One thing that is going to become more and more of a factor is that ‘bankable management’”, says Klemmer. “If we can look at the management decisions the applicant has been making, that helps to add credibility to their position.” This is also where key planning documents can help to build your position. “Having a business plan, a marketing strategy, and going in and having a good conversation with your lender is going to go a long way in terms of building that feeling of trust,” Klemmer says.
Business planning, especially if young farmers have been through a few harvests, also allows them to approach lending and credit differently by usually having a better understanding of the business cycle. “Have a plan and be able to back it up with facts,” says Wilson. “If you are projecting a certain level of sales, how does that line up with past production and prices? If you are projecting a certain level of profitability, how does that line up with past gross margin? If you are new to the sector, then how do your assumptions compare to industry norms?”
Bankable in unsteady times
One of the challenges facing the incoming generation today is trying to get a handle on industry norms and what is typical in an era of record inflation, rising interest rates, and high commodity prices. Economist Klemmer says now is the time to engage with a professional team to ensure you have a deep understanding of the operation’s overall financial picture.
“Farms are big businesses, and the finances require your attention, even if it is your family’s operation,” he says. “During times of economic uncertainty, especially when preparing for credit, it is so important to work with all of the operations partners — the accountants, financial advisors, the board or family members, and make sure there are strategies on how to maintain or control costs,” he says.
“This includes looking at all labour, having a risk management and marketing plan in place, and trying to stick to those plans.”
It’s also important to remember that sometimes hearing “no” on a loan can be a push in the right direction for the farmer to prepare their business in an area that is currently falling short.
“A ‘no’ is usually followed by a ‘but here’s what you can do’, which is specific to each farmer,” says Wilson. “One facet of the application may be weak, say for instance leverage but that weakness may be offset by other strengths such as strong ability to repay and excellent credit record. The key, both for the lender and the borrower, is to understand the risks and be comfortable that there are sufficient mitigating factors to offset those risks so that the borrower can be successful, and the lender can be repaid.”
The incoming farming generation needs to be reminded our agriculture industry is strong in Canada, despite high property prices, rising interest rates and market fluctuations, and that Canadian farmers are leaders in agricultural efficiencies. “Farming Canadians are doing a better job in terms of moving more efficiently,” says Wilson. “The investment in quotas, land and efficiencies in operations is creating higher agricultural outputs across our country.”
Boost your bankability
“In the end, good planning, hard work, mentoring, perseverance and unique financial solutions are all keys to overcoming barriers to entry,” says FCC’s Perry Wilson. But there are some steps the incoming generation can take now to prepare for bankability:
Make sure you collect all your financial information. Start to understand your financial statements and things like your net worth and tax returns.
Learn all aspects of financing. Spend time understanding interest, how payments are made and different amortization scenarios.
Get involved early. Take the time to be involved in farm financials at an early stage to help you understand the finances of the operation. Reach out to a lender and build relationships before you need to borrow. Building that relationship can help in long-term planning and in meeting expectations.
Be able to answer questions about how well you know the farming operation. Understand the farm’s cash-flow plan and create (or enhance) the farm’s business plan. Demonstrate how you understand the business cycle of the farm.
Consider renting before you purchase. Look at renting the operation before purchase to give you a true sense of learning the books and taking calculated future risks about deciding when to grow.
