Why Do Ag Lenders Ask So Many Questions?

Borrowing money is not like going to the grocery store. You can’t just take money off the shelf and promise to pay it back someday . . . “No questions asked!” The money is not a gift or a grant but it is expected that one will return the money with interest. Not everyone has the ability to borrow money, nor the capacity to pay it back. Most have every intention to repay the loan but that is different than actually paying the loan back.

In the Gospel of Luke the question is asked, “For which one of you, when he wants to build a tower, does not first sit down and calculate the cost to see if he has enough to complete it?  Otherwise, when he has laid a foundation and is not able to finish, all who observe it begin to ridicule him, saying ‘This man began to build and was not able to finish.’” The calculation of being able to complete a task has been around for a long time.  One must determine their ability to complete any project. In the case of borrowing money, not only the borrower, but the banker may be ridiculed for making the wrong loan.
Let’s look at this made up example.  (Disclaimer; this is a collection of thoughts from over 40 years and any similarity to the reader’s situation is purely unintentional.) Now YOU be the banker…

John Sample wants to put up a grain leg on his parents grain and cattle farm. John is 25 years old, graduated from college a few years ago with a degree in business management. John is currently living at home but is engaged to be married to his college girlfriend. She has little interest in farming. John just bought a 2018, 4x4, Diesel pickup truck that cost $69,900. His current truck was coming off warranty so he thought it was the right time to trade. John trucks grain on the side under “JS Trucking LLC” and pays himself a wage. He is also a 25% owner of the family seed dealership, “JS Seeds LLC”  He is on the local Co-op board, taking over for his father last year who is highly respected in the local area.  

John’s parents, Uriah and Ima Sample, own 200 acres with a $250,000 mortgage at a local bank. They also have a full line of farm equipment but would like to transfer the whole operation to John in a few years. They farm on a cash rented basis among five landlords on 1,500 acres in Indiana and Ohio.  Ima is a school teacher and her job provides health insurance, but she is concerned about budget cuts and job security before she is able to retire. She also does the farm records on a self-designed computer program. Their two other children currently show no interest in the farm; however, the parents want to be fair to them when John takes on the farm operation. One child is an accountant and the other is on unemployment. There are four grandchildren, and one particularly likes to play with tractors and a miniature farm set.

So what you think . . . Just make the loan? That is what some bankers did prior to the crisis of the 1980’s.  They may have thought it is a good family with good collateral so what could possibly go wrong? Well now we know what can go wrong so we ask questions. This example is full of potential “lending landmines. “Unfortunately, my space is limited to discuss them all.  To name a few, I need to know who or what entity is going to borrow the money? What is the security and where will it to located?  Are all parties (including the wife-to-be) willing to sign the note and collateral agreements? What are the long term goals, have they calculated the costs and how quickly do they plan to put them in action?