From Tina LeBrun and Wayne Schoper
South Central College
As a young producer, there is a chance you might be viewed by lenders as a financial risk. Your net worth is probably low and your credit score could be almost nonexistent. Understanding how credit is determined and how to improve your standing can be essential as you start buying farm assets such as inputs, machinery, and land.
Tina LeBrun and Wayne Schoper
Most financial advisors agree that it's never too early to lay the groundwork for a strong credit history. To discover credit risk, lenders often buy a credit report and credit score from a credit reporting agency. The credit report includes your type of credit (credit cards, loans, mortgages, etc.), credit limit, account balance, payment history and bankruptcy history. Credit scores (usually between 300 and 850) are based on the details in your credit report. Lenders use the score to determine their level of risk when lending to you. Generally, the higher the credit score, the lower the risk you pose as a borrower.
Establish a healthy credit history by taking out a small loan that can easily be paid back, it's much simpler to ask a lender for $25,000 than to ask for funding to buy acres of farmland for much higher dollar amount. Also, don't be discouraged if you have a few black marks on your credit history. Simply, explain why and show how you can improve upon it from this point forward.
Often a business plan may be proof enough. When a young producer is looking to establish credit, they don't carry a lot of financial strength since they don't have many assets. Components such as financial statements, business plans and family support become much more essential to young borrowers. The University of Minnesota's Center for Farm Financial Management offers a free website that was created to assist farm producers with the task of building a business plan. You can find this tool at: www.agplan.umn.edu and learn more about this very important element of farm management.
As a young producer are you part of a multigenerational farm family? Parents you can assist in this process too. Involve younger partners in the financial decision-making process early, so they can begin to understand the farm's financial standing and how it affects their future. Additionally, young farmers can start to develop a relationship with their lender. You don't want a lender who just says yes or no, but someone who teams up with you as you start to make decisions-someone who can grow with you and challenge you along the way.
Begin by developing valuable financial habits now. Controlling your debt and making payments on time are the best ways to build and maintain a strong credit history. To keep your credit in good standing, follow these tips:
Pay at least your total minimum due each month.
Always pay your bills on time, to avoid additional fees.
Check your credit card statements and bills for any discrepancies. If found, report them immediately.
If possible, keep at least a 15% cushion of available credit in your account.
Follow the "20-10" rule. Limit your total debt to less than 20% of your total income. Each month, less than 10% of your net income should go toward paying off credit card bills. If you're paying more, reconsider your spending.
Avoid using cash advances. They are the most costly way to use credit, since you will pay higher interest rates and fees for cash than for purchases.
You can check your credit score for free, once a year, at sites such as www.annualcreditreport.com.
Start building credit now to make big purchases in the future. Becoming a farm owner/operator is more challenging than ever to start up. Find the appropriate resources to help you get on your feet, by managing your financials successfully from day one.