Do you understand the three C’s of lending?

How many farmers understand the three C's of lending? The purpose of this article is to enlighten potential borrowers what goes on in the mind of a lender and is designed to create a positive attitude.

How often do you hear of farmers that have been turned down for funding to buy the neighbour's farm? Some farming borrowers cannot understand why, when they believe they have the equity, the deposit or income to acquire a new farm property.

Lending is mostly based on fact; however there can also be a certain amount of subjectivity involved. Many rural lenders are University Graduates who are involved in the industry for a number of years before they are experienced enough to make lending decisions. They, like you, are human beings subject to emotion and opportunity. Often the difference between having funds approved versus declined is how well the application is presented.

With lending there are three things that are really important: Collateral, Capacity and Character.


This is the security which you are putting up to support the application for the loan. In the unlikely event of a default, the farm lender is going to look at what they can sell and what they can do to recover the loan. Remember they lend the money and they have first security. Your cash is used as a second security; therefore you are the one who is taking the risk. Remember that the bank will not want to lose any money, so they will only going to lend to the maximum they are comfortable with.

Some of the other things a lender is going to look at is the level of fertility on the farm and the need for further fertilizer applications. They will also look at the contingent liabilities, ie. Does the cowshed need extending, or does the farm need a new cowshed? Does the house need renovating? Is the water supply up to scratch? Is the effluent system working properly, or do you need further money spent here? These contingent liabilities increase the lending amount and place the bank outside the maximum lending rate.

It is important to take into consideration the location of the property. Is there consistent rainfall, or is it an area that suffers from summer dry? Is there adequate water if you are irrigating? Is the locality where the farm is situated readily saleable, or is it an area that farms are hard to sell, particularly when the market is more difficult? Often a valuation is required. The valuer discloses any shortcomings on the property and also any issues. It gives the lenders confidence if the valuer gives a clean property description.


This is the ability to meet the debt servicing. Lenders will look at your personal circumstances, ie. What is your background? Have you have saved your own money, or is it coming from family? Are you consistent and certain of where you are going? Will the farm produce the kilograms, or drystock figures that you have suggested, or are you overstating the production? If the production is overstated and the debt is high, they will start discounting it.

The lender will look at certainty of income. For example: Has the property been a consistent producer? Can the property consistently produce the kilograms? Can it consistently service the debt? If there are any deficiencies, then these will be taken into account.

The lender will also look at your budget. They will also complete their own based on a debt servicing ratio. Debt servicing ratio means your interest bill plus any farm leases should not exceed a certain percentage of the gross farm income. In the case of dairy farming, this can be to a maximum level of between 30 – 40%. If you are an outstanding farmer in a desirable area, on a farm that has been consistently producing, they may push this percentage out further, allowing you to service further debt.


This "C" is what it's all about. Brokers and lenders want to know what sort of person you are, ie. Are you honest? Have you accumulated assets relative to your age? Have you had the necessary experience to run the farming business? Have you shown good savings ability? Do you have a good track record? Do you have a clean credit report?

A clean credit report is essential. If there are any defaults or collection registered against your name, a full explanation is going to be required. Notwithstanding this, if your credit report has four collections on it, then some of the banks will not lend to you as they see you as a credit risk. Sometimes there are very good reasons why you have a default against your name and these need to be carefully explained.

The character reference is really important. Lenders in the rural sector appear to have the attitude that this is the key factor when lending. If you are of good character, with proven ability, know what you are doing, have the ability to produce the kilograms and the ability to meet their loans, then they are going to weight this more heavily than the capacity or the collateral. If you are of good character, then a lot of the battle is won and maybe getting a lender to push the boundaries on the other two "C's" will be not so hard.

In summary, lenders are looking at your Collateral, Capacity and Character. The main one they look at is the Character, along with this integrity is really important here.

Full disclosure of all information relevant to your application is essential and documented as carefully as possible, more is best. An application direct to the lenders is fine, but if there are any doubtful areas, then a broker can assist in this area. Fraser Farm Finance are specialists in providing funding packages for farmers and going to the appropriate sources.


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