Originally published on November 3, 2005


In developing credit worthiness, it helps to look at it from the lender's perspective.

With this in mind, I met with two agricultural lenders: Terry LaRocque and Jay Bohrson. Our discussion focused on what has come to be known as the 3 Cs (character, capacity and collateral) and 3 Rs (return, risk and repayment) of lending.  

* Character is the record of whether a person has regularly paid off commitments without difficulties. It also refers to the borrower's effort to repay loans under adverse conditions.

LaRocque and Bohrson agreed that it is easier to lend money to someone who has a proven ability to adjust successfully to changing conditions in agriculture.

They also said borrowers' willingness to co-operate with their banker can be demonstrated in the simplest form. A customer who promptly returns their banker's call and one who follows through with a promise to deliver requested financial information or cover an overdraft by a specified date demonstrates a favourable character to lenders.

Danger signals include an unwillingness by the borrower to fully disclose his financial information, past financial problems such as bankruptcy or other consumer credit score demerits, and a history of slow repayments to suppliers. 

Lenders are also leery of a borrower who expects an immediate decision and who is always in too much of a hurry to provide requested information. 

There is also concern with the borrower who deals with numerous banks and creditors.

I asked if there were still borrowers who bought items before they had arranged for financing. Both lenders agreed this seldom, if ever, happens.

Capacity is the ability and strength of your farm to meet loan payments when due.

While similar to the R in repayment, capacity is a function of the farm's historical income gathered over a three-year period.  Capacity can also refer to the amount of equity in the farm and its ability to refinance or consolidate debt over a longer term.

This capacity to repay debt is generally the irony of banking. It is frequently said that if a borrower needs a loan he can't get one, but if he doesn't need one, it is available to him.

LaRocque and Bohrson stressed the importance of being in a sound financial position before applying for a loan but also acknowledged there are situations where the borrower may be asset rich and cash poor and will have to borrow for operating capital.




They also encourage borrowers to finance capital purchases to ease cash flow requirements, even though they may have enough cash available to cover the purchase.

Collateral is the lender's assurance of security behind the loan. Out of the three Cs, both lenders rated this at the bottom of their lists. The last thing any lender wants to do is foreclose on security. A farmer with a strong net worth must still be sure that not all of his equity is in fixed assets such as land, which would limit funds available for daily operations.

Return refers to the profitability of the credit. Will it produce sufficient returns to cover the costs? Does it pay for the farmer to borrow the money?

While LaRocque and Bohrson admit that the question of return is often subjective, return is always a key ingredient in the write-up of any credit. They said consolidating a farm's debt may be one of the better returns for the farm as a whole. For this reason a consolidation loan is not treated differently from a return perspective than a loan to buy 50 cows.

Risk is the borrower's ability to bear risk and survive unexpected low income, high costs and bad years. Some factors in assessing risk are the owner's equity, the ability to make and save money, the stability and reliability of income and ability to reduce operating and living expenses in poor periods.  

Repayment, while similar to capacity,

focuses more on the ability of the farm to repay its loan over the average conditions that are expected to prevail during the life of the loan. The term "average" is again a moving target.

Our lenders felt that provincial crop insurance yields are a conservative average and if this is used to prove effective debt servicing, it is more likely than not a good loan.

They added that production yields higher than their crop insurance coverage can also be used to support an average repayment.

With farms becoming larger and cash flows becoming tighter due to agricultural downturns, it is essential for today's farm manager to have an open-minded, flexible, professional relationship with his agricultural lender.

The first step to doing this is to re-examine the farm's credit worthiness. I hope a lender's perspective offers additional insight.



Allyn Tastad, chartered professional accountant, is a partner in the accounting firm of Hounjet Tastad Harpham in Saskatoon at 306-653-5100, e-mail at or website All data and information provided is for informational purposes only. Readers are cautioned that laws and regulations are subject to change. Consult your accountant for current professional advice tailored to your situation.