Do you need a loan for your farm or small business? What do lenders look for? Yeng Her of Valley Small Business Development Corp. in Fresno, California, says there are two types of lenders to borrow money from. Traditional lenders, which are primarily banks, national, regional and community. Nontraditional lenders are federal or government funding such as CDFI or USDA Farm Service Agency. Farmers tend to use a lot cash to pay their bills, so they don’t take out loans, they don’t have credit history. Lack of credit history isn’t as bad as having bad credit history, said Her during the “Dollars and Sense of Agriculture Lending” at the 2017 World Ag Expo.

Credit is still crucial and lenders look at these five C’s of Credit when determining whether to approve a loan:

1. Capacity

This is the most critical piece of credit information because cash flow and the management of the cash flow is crucial in small businesses and farms. Cash flow shows the ability to be able to repay the loan – which is one of the top things the lender needs to know and verify.

2. Collateral

Lenders must think of the worst-case scenario. If the borrower’s business were to fail, how would the lender get their money back? Liquidate assets, sell real estate? Collateral and other investments can be a negotiating aspect for getting a loan. Credit enhancements will help if there is no collateral.

3. Capital

Lenders want to see that the business owner has a portion invested of their own money or real estate. It’s important that the lender sees the borrower also has something they are willing to put at stake. A general rule, according to Her, is that about 25 percent of all invested should be by the business owner.

4. Condition

Lenders look at what is being bought ad what the money is going into. If it’s land for a grower or farmer, what is the condition of the land? Recently in California, the buying condition of land was heavily influenced by drought and water conditions.

5. Character

The credit history and credit report are analyzed by the lender. If no business credit history is available, personal credit history will be examined instead. Along with credit history, experience, management background and direct industry experience are all considered. Especially when looking for a loan as a new or up-and-coming farmer or grower. In small communities, character holds a lot of weight since it is easy to find out if the business owner pays bill on time and has a reliable reputation.