Business Plans: A Lender's Perspective
In the Knowledge Center, we know how important business plans are to a farming operation or agribusiness. Because of its importance, we offer multiple courses on the process of business planning.
Business plans become extremely important if you intend to secure operation financing. Loan officers often ask for the objectives and goals of your operation. A written business plan is the most effective way to communicate your goals in all aspects of your agricultural operation.
To better understand what lenders look for in business plans, we contacted them for their input on the topic.
Knowledge Center: What do you wish that customers knew about business plans?
Carol: A business plan, while good on paper, is not written in stone; it's just a strategy and, with a changing economy, strategies must be adapted for plans to reap results.
Anthony: It is essential to have a WRITTEN business plan. Most customers have a plan in their head, and it takes time to get the plan from their head onto paper. A written business plan communicates the clear direction of an operation and is beneficial if the customer is obtaining financing needs for their operations. The loan officer and other departments will read and review the written plan. A business that has been in operation for several years can provide tax returns in which we can review trends. However, if they are looking to expand or change their operation, a plan would be a clear communication tool to make financial projections and determine if their change or expansion would be viable.
Knowledge Center: In your opinion, what is an essential section of a business plan?
Carol: Cashflow. A business is no different than a home budget; you must have a reserve or at least qualify for a good line of credit!
Anthony: Producers often know what they can get for their products. However, many don't know their cost of production. I think the business plan's most essential section is knowing your fixed and variable expenses. Knowing your fixed and variable expenses provides producers with a cost of production and what is needed for the owner to operate at break-even. Suppose the business has multiple enterprises; attempt to break each enterprise down into individual businesses. Yes, diversification is good, but we often see producers putting a lot of time into an enterprise that takes the profits from a portion of the business that doesn't take as much time.
Knowledge Center: Share your top 5 things to include in a business plan:
- Will the business cash flow? Are you more dependent on the people or the product?
- Details of the company, including the nature of the business, products/services offered, and the need for such products/services.
- What is the owner's sales or marketing strategy?
- How will the company be managed?
- Customer service strategy and philosophy.
- Who are the managers and the employees of the business?
- Location of the business.
- What products will be sold and how (what markets)?
- A projection of income from the sold products.
- A breakdown of expenses.
- Risk management strategies and backup plans.
A written business plan explaining all aspects of a farming operation effectively communicates your business to lenders. Often, a plan is not written down on paper but is in the head of the managers. Taking the time to put your business in writing will save time in the future, help you communicate your business to lenders, and help with business decisions.
Learn more about business planning with the Knowledge Center. Visit our Ag Courses page to view our available business planning courses. You can also access multiple farm management tools and resource in our Agricultural Business Toolkit called From the Ground Up.
Have additional questions? Reach out to the Knowledge Center by emailing KnowledgeCenter@FCVirginias.com.
Anthony Watson, Loan Officer
Farm Credit of the Virginias, Wytheville Branch Office
Carol Robinson, Loan Officer
Farm Credit of the Virginias, Abingdon Branch Office