Before deciding to purchase or expand, borrowers should consider what they currently have, what they want the money for and what their plan is for the future. A particular goal or need has brought them to the borrowing arena: they have a dream, or are looking to make a career change, or they wont to build something for the future. At that point, we can begin to solve the financial puzzle, determining together what they can afford. And if they can’t afford it now, we’ll discuss what they need to do in order to afford it in the future. A lender will ask many questions.
Some of these questions are:
You’ll need to determine the cash flow and the collateral for the loan. Anyone borrowing money needs to know whether or not they can expect to make money. If it will not make money, then they need to demonstrate they can make the payments on the loan.
What is the value of all collateral being pledged? The loan to appraised value will be determined from the loan amount divided by collateral pledged. Collateral can be what is being purchased or it can be another property being pledged. A down payment will lower the amount of the loan needed.
Looking at the ‘big picture’, financially speaking, what assets does the borrower have? What liabilities do they have? These answers will aid in filling out a financial statement that will give us their net worth. The financial statement sometimes is also called a balance sheet. This is a financial snapshot of what you have and what you owe on any given day.
Once we have answered these questions we can begin to run cash flows on the purchase or expansion. The combination of the loan amount and cash flow projections will determine the net income available after payments and expenses. This will be the expected salary earned from the operation. These two items will help determine if the new venture has the potential to be successful. There will still be more information needed, but this will put you on the right path for success. Most experienced lenders should be able to provide you an idea of how they would structure the loan based on what you are looking to achieve and an estimated cash flow based on your proposed expansion or farm purchase.
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