Are you looking for a higher chance of having your farm loan application approved?
Loans are easy to apply in Kenya. They are just a click away on your mobile App. However, they do not always get approved. You are also likely to misuse the cash proceeds risking your house or farm getting auctioned.
In this debt management guide, we will give you tips to get your loan approved. Documents and materials that banks look into and tips to ensure you pay your loan on time despite unforeseen farm risks like droughts.
Understand How your Farm loan Application is Analysed
Have you ever wondered how banks determine if you are creditworthy? framework for analyzing the creditworthiness of an individual or business? These factors help lenders assess the risk associated with extending credit. The 5 Cs are:
Character- Good Credit Score
Character, in the realm of creditworthiness, is akin to your financial reputation. It reflects how trustworthy you are in terms of repaying borrowed money. Lenders delve into your past financial actions, scrutinizing whether you’ve been diligent in paying bills on time and managing credit responsibly.
Building a good financial character instills trust in lenders, making them more inclined to approve your loan, knowing you have a reliable history of meeting financial commitments.
Tips to improve your character
- Maintain a Positive Credit History: Make you pay your bills on time, including credit cards and other debts. Provide a loan clearance certificate.
- Provide Strong References: Include reputable references & guarantors such as previous lenders, landlords, or business associates.
- Be Transparent About Your Financial History: Clearly explain any past financial challenges or issues.
Capacity-Consistent cashflow or Savings
Capacity revolves around your ability to repay a loan, essentially asking if you have the financial means to take on additional debt. Lenders assess your income, cashflows, and overall financial stability to ensure you can comfortably pay the new loan.
You may need to demonstrate sufficient farm management experience through education, on-the-job training, or general farm experience to assure the lender of their ability to manage the farming operation and repay the loan
Demonstrating a solid capacity to repay not only increases your chances of loan approval. Besides, it also instills confidence you can pay both interest and principal loan obligations.
Tips to enhance your capacity
- Demonstrate Stable Income: Give evidence of consistent earnings and savings such as payslips or 6 months’ bank statements.
- Manage Existing Debts Effectively: Prioritize paying down existing debts and maintaining a healthy debt-to-income ratio.
- Highlight Additional Income Sources: If applicable, showcase any supplementary sources of income.
Capital- 20% Downpayment
Consider capital as your financial commitment to a venture. It represents the amount of your own money you’ve invested in a business or project. Having a stake in the game demonstrates seriousness and responsibility.
A significant capital contribution e.g. 20% is a positive factor in your loan appraisal. It indicates your commitment to the endeavor and your willingness to take on a share of the risk.
Tips to show you have enough capital
- Invest Personal Savings: Make a significant personal investment in the project or business such as 20% to signal commitment.
- Build Business Equity: Increase the retained earnings or equity in your business by reinvesting profits.
- Clearly Outline Capital Contributions: Clearly articulate how your personal and business capital will be utilized in the project using practical business plans, budgets and projected cash statements.
Collateral- Legal Documentation
Collateral acts as a safety net for lenders. It involves pledging valuable assets, such as your home or car, to secure the loan. This provides lenders with a backup plan, assuring them that if, for any reason, they are unable to repay the loan, there are tangible assets they can claim.
Offering collateral or security mitigates the potential losses in the event of unforeseen circumstances. The bank can auction it as a last resort to recover the loan.
Tips to give a good loan security
- Identify Valuable Assets: Ensure that the security offered has significant value. Land, Houses, Cars, or other assets with clear valuations strengthen your loan application.
- Keep Collateral Separate: Avoid pledging assets that are already tied to existing loans or other obligations.
- Regularly Update Asset Valuations: Periodically value your pledged assets to reflect their current market worth accurately.
- Consider taking loan insurance. It is designed to pay for the loans in case something occurs affecting your ability to pay the loan, such as disability, death, or loss of employment. This way, your house or assets won’t be auctioned.
Conditions-Business Plan
Conditions take into account the broader circumstances surrounding your loan. Lenders consider the purpose of the loan and evaluate the economic environment. They seek to understand how external factors might impact your ability to repay.
By assessing conditions, lenders can ensure that the terms of the loan align with the current economic climate and your specific situation. It also shows foresight, preparedness and a proactive approach to managing external factors that may impact your liquidity.
- Clearly Define Loan Purpose: Clearly articulate the purpose of the loan and how it aligns with your overall business plan, budget, and financial goals.
- Stay Informed About Economic Trends: Be aware of economic conditions and industry trends relevant to your business and industry by doing PESTLE and SWOT analysis
- Establish Contingency Plans: Address potential risks and how to manage or mitigate them by outlining practical contingency plans. This
Best Farm Records to support your Loan Application Approval
Besides the official bank loan application form, providing other documents may increase your chances of your loan approval. They showcase your preparedness and professionalism as a commercial farmer or a business person.
These documents include a business plan, a budget, and bank statements. The list below has a comprehensive set of documents that financial institutions need when processing a loan application. These requirements are crucial for the bank to assess the creditworthiness, financial stability, and overall viability of the business or individual seeking a loan.
Apart from preparing them to impress your bank, ongoing record-keeping and farm accounting can make you more successful.
| Document | Significance |
|---|---|
| Business Plan | Overview of business goals, operations, and financial projections. |
| Organogram | The organizational chart of Management and staff shows the hierarchy and responsibilities within the organization. |
| Audited Financial Statements | Snapshot of your commercial farm financial performance as shown in the income statement, balance sheet, and statement of cash flows. |
| Management Accounts | A budget variance report to show the recent financial data if audited statements are older than six months. |
| Projected Financial Statements | The expected Balance Sheets and Income Statements gives an insight into future expected financial performance and ability to meet your loan obligations. |
| Projected Cash Flow | A projected budget evaluates your cash flow dynamics and assumptions made in its forecasting. |
| Legal Documents | Business Registration Certificates and Licences will confirm the legal structure of your small business and your compliance with applicable regulations. They include CR12, KRA PIN Certificate |
| Bank Statements | Personal and Business bank account statements for at least 6 months to demonstrate your cashflows, income, expenses, savings, and liquidity. |
| Wealth Declaration Forms | These Personal Financial Statements will help to Assess the financial stability and obligations of key individuals. |
| Lease Agreement | Verification of leasing arrangements and associated costs (if applicable) |
| Copies of Contracts Secured | Validates the existence of revenue-contributing contracts. |
| Auditors Reference letters | Serves as an Independent confirmation of business financial health or a reference or guarantee letter of your character. |
| Debtors and Creditors Age Analysis | Helps the bank to assess your receivables, payables, and overall liquidity ratios |
| CVs of Business Principals | Highlights qualifications and experience of key individuals. Demonstrates sufficient farm management experience through education, on-the-job training, or general farm experience |
| Identification Documents | The copies of your ID, Marriage Certificates, and Proof of Address are official documents that confirm your identity, marital status, and place of residence. |
| Title Deeds | Your Property Description, valuation and Bond Statement will give Details about fixed assets and associated mortgages. |
| Loan Clearance Certificates | Reveals other existing financial obligations or encumbrances. Discloses the Claims/Attachments by Other Financial Institutions |
How to pay your farm loan faster
Assuming you have taken the loan for crop or animal production, how can you use it do the right reason, improve harvests and pay it on time or earlier? The following 6 tips advises you on how to manage it more effectively.
- Create and use a Farm Budget: Understand your farming income and expenses to allocate funds for loan repayments and crop production.
- Pay on Time: Timely loan repayments are crucial to avoid penalties and maintain a good credit history, which can be important for future farming loans.
- Utilize Loan for Crop & Livestock Investment: Ensure that the credit is used efficiently for crop inputs, such as seeds, fertilizers, and equipment, to maximize crop yields and returns.
- Monitor Crop Performance: Keep track of your crop calendar activities and performance to ensure that the investment from the loan generates the expected returns, which can help in loan repayment and future loan eligibility.
- Consider Refinancing for Farm Loans: Explore options to refinance the farming loan if lower interest rates or better terms become available, which can reduce the loan cost.
- Explore Government Aid Programs: Investigate government farm loan programs, such as those offered by the AFC, which are specifically designed to support farmers and ranchers with their financial needs.
By applying these strategies, you can effectively manage your farming loan, optimize crop production, and work towards a successful and sustainable farming operation.
