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#050 - Your Farm Loan Will Be Rejected If You Do These 4 Things · Dollars In The Dirt

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  A farm loan can be knocked back even when the property is the perfect next
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  step for your business. Most producers think the property, the
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  cattle and good story will carry the loan. After helping hundreds
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  of farmers secure over a billion dollars in finance, I can tell you
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  that lenders are looking closely at your cash flow, security, overall
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  equity and statutory obligations before they approve the deal.
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  So in this video, I'm going to show you the four mistakes that get applications knocked
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  back and what the fix is before you apply. The first thing
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  I'd look at is your cash flow. Can the business actually service the
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  debt? And that's one of the lender's core questions. But serviceability is
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  where many applications fall over. A lender doesn't just
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  want a good story. They want numbers that show the loan can be
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  repaid. They'll look at the business income, they'll look at the normal
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  expenses, they'll look at the existing debt, and then they'll test
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  the new debt as well. The thing is, they
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  won't only test today's interest rate. They'll usually test the
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  debt at a sensitised rate. That means they want some room in the numbers.
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  If the forecast is too tight, that becomes a problem. And
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  if the forecast is loss-making, that's even a bigger problem. A
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  cash flow has to match the real business. It can't just be
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  a spreadsheet that looks neat. Say you're running a livestock business. You
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  might show a big cattle sales number this year. On its own,
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  that doesn't prove much. you may have sold down the herd to
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  get the cash. So where do the next year's cattle sales come
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  from? And that's why a stock schedule matters. That gives a
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  lender a clear picture. They can see if the
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  forecast makes sense. And they can see whether the herd supports
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  the sales. They can see whether income is being pulled
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  forward. And without that schedule, the cash flow is weaker. A
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  good forecast ties back to the operation. It should
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  reflect how the place normally performs. It
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  should make sense across seasons and it should also
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  show the proposed debt properly. That means existing
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  repayments are in there, the new repayment needs to be in there
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  and interest needs to be realistic and principal payments need
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  to be accounted for if they're required and expenses need
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  to be realistic as well. A common issue is using the
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  best year as your base. That can make the deal look
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  better than it really is. A lender will usually see straight
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  through that, and they'll look at the history, they'll look at the last few years,
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  and they'll ask whether the forecast matches the business at
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  hand. If the forecast only works in a perfect year,
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  that's risky, and that's why a complete lender pack matters. The
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  cash flow should be clear, the stock schedule should support
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  it, and the debt schedule should match the repayments, and
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  the story should explain what you're doing. It
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  should explain why the purchase works and that gives the lender a
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  proper file from day one. It doesn't guarantee an approval though, but
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  it gives the application the best chance. By the way, if
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  you're looking at buying a property or growing the business, book a free call. We
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  can talk through what the finance could look like and how to present it to a bank
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  in a way that actually gets the deal across the line. The next issue is
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  security. And this is the other core question for the lender. Is
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  there enough security behind the loan? And that might be the
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  property you're buying, and it might include other property you already
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  own. And it totally depends on the deal, and it depends on
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  the lender, and it depends on the policy at the time. Rural
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  lending usually needs a higher deposit than a home loan. An
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  indicative example is a 70% loan-to-value ratio. That
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  means you need 30% equity in the property. But treat that
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  as an example only. It's policy-dependent, it's lender-dependent, and
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  it can change. Say you're buying a place for a million dollars. If
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  the lender wants 30% equity, you need $300,000. That could
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  be cash or that could be equity in other property. And it
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  has to be acceptable security for that lender. And that last part
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  really matters. The lender still needs enough acceptable security,
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  and if the deposit is light, the application can stall, and
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  if the equity isn't there, the deal might not fit the policy. What
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  that means is, you need to check it early. You don't wait until a
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  contract is under pressure, and don't assume the bank will make it fit.
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  Map out the security position before you lodge the loan application, and
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  look at what you're buying, look at what you already own, and look at your existing
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  debt over these properties. Then look at what equity is actually
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  available. And if it doesn't fit, you want to
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  know early. There might be another way to structure it. There might
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  be another lender policy that suits better. Or
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  the answer might be that the numbers don't work yet. And that's
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  still useful. it stops you chasing approval that can't happen.
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  So here's the issue. A good property doesn't fix a weak security position,
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  and a good operator doesn't fix a missing deposit. The deal needs
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  enough equity from the start. And if it doesn't, get clear
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  on that early. Then you can decide what to do next. The
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  third reason is overall equity. This is different from security
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  on the loan. The lender looks at the whole business position. They
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  look at what you own, they look at what you owe, then they look at what
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  equity is left in the business. The overall position has
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  to fit their guidelines and this is where some deals get caught.
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  The purchase might look alright by itself, the cash flow might
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  look close and the security might look workable, but
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  the whole balance sheet may still sit outside the bank's policy. And
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  if that happens, the application can be rejected. Say
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  you're a family grazing business, you might own one property, and
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  you might be buying the neighbor. You might also have a machinery finance.
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  You might also have livestock debt. You might have other business liabilities.
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  The lender doesn't only look at the new purchase. They look at the whole picture.
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  And that whole picture tells them how much rooms the business has. It
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  tells them how much pressure is already there. And it tells whether the
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  business can carry any more debt. And that's why you can't only look
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  at the purchase price. You need to look at the whole balance sheet. A
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  clean statement of opposition here helps. List all your assets properly.
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  List the liabilities properly. Don't leave things out that make
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  it look better. That usually creates more questions later. If
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  there's a liability, show it. And if there's a loan, show it. And
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  if there's a tax amount outstanding, show it. If you've got business debts,
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  show them also. The goal is to match reality. A
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  lender needs to see the position clearly. It's much better
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  to prepare the file properly first. The first
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  thing I'd look at is the real position. Where are the assets? Where
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  are the debts? And what equity is left? And does that fit
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  the lender's guidelines? And if the answer is no, don't pretend
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  it does. Get the position clear. Then decide whether the
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  application should go in. And that saves time. It
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  also protects the relationship with your lender. The fourth reason is
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  where character comes in. Character doesn't mean telling a good story.
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  It shows up in how the business is managed. One of the biggest areas
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  is statutory obligations. That includes ATO, BAS,
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  PAYG, and also includes super liability. If
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  those are unpaid or unmanaged, it can be a problem. A
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  lender will usually take this quite seriously. It tells them something
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  about your cash control, it tells them something about your management, and
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  it can also suggest the business is under pressure. But
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  the lender still needs to see it's managed. They don't want to be asked to
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  ignore it. They want to understand the position and they want to see what's been
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  done about it. So if that's you, clean it up before you lodge a loan application.
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  Talk to your accountant about your tax position and get clear on
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  what is owing. Get clear on what has been lodged. Get clear on
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  what needs to be brought up to date. And then make sure the finance pack
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  reflects reality. If there's an issue, explain it.
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  And if it has been fixed, show that. And if you're managing, show
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  that clearly also. The main point is, don't hide these
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  liabilities. A hidden issue damages confidence. A
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  clear issue can at least be assessed. And there's a big
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  difference between those two things. But the ACO position is
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  messy. and that can still stop the deal. The lender may ask
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  why it hasn't been managed, and they may ask whether cash flow is
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  really strong enough. They may also ask what else has been
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  missed, and that's not where you want the application to be. You
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  want the file to be clean, you want your obligations up to date, or
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  you want them clearly managed. The lender can focus on the purchase. Most
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  of the time, the fix starts before lodgement. Get
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  the information together, check your assumptions, prepare
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  the schedules, clean up your statutory position, then
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  present the application properly. If you want to avoid a rejected application,
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  fix these four areas before you lodge. Show real serviceability with
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  a proper cash flow, back your livestock income with a stock schedule, back
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  your cropping income with yields and assumptions, and make sure there's
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  enough security for the loan. Check your overall equity position against
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  your lender's guidelines and clean up your ATO, super
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  and statutory obligations before applying. And present this
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  information in one complete pack. That's how to avoid preventable
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  delays. That's also how you avoid preventable declines. If
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  you want help structuring the loan, forecasting your cash flow and
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  preparing a lender plaque, we do that for producers every