How to Better Work With Lenders
November 29, 2016
The ongoing business relationship farm businesses have with their lending institution has become a competitive advantage for today’s farms. It takes a lot of capital to run a farm, and most farms don’t have it on-hand. Even after all we’ve read about banking situations gone south, successful farmers still recognize that bankers are a valuable part of their team.
Securing capital from a bank is not like going to the local farm store and picking up new hoses (wouldn’t it be nice if getting bank loans was that easy?). We all know farms must meet certain requirements and financial thresholds to be able to secure a loan. This makes having strong financial records and projections key.
For nine months out of a year, a farm business has most of its current assets tied up in the form of a growing crop out in the field. As exciting as the corn or wheat or cotton or beans are to look at, they don’t pay for the equipment or cover next year’s fertilizer bill. In fact, the crop doesn’t generate income until it’s harvested and sold to a customer. Farms need to have the cash to purchase inputs to produce a crop and keep the lights on for almost a year until they receive payment. Some farms are in a strong enough financial position to float these operating expenses themselves. Others rely on a lending institution to come in and help bridge the gap by providing financing.
It comes down to flexibility: farms that have strong relationships and established credibility with their lender have a wider set of choices they can make. They can make decisions that they believe are truly in the best interest of the business, rather than being at the mercy of a lender’s approval and making tradeoffs they don’t want to make. Farms with strong lender relationships also have the ability to be more aggressive and take calculated risks. On the flip side, farms without access to capital often miss out on opportunities or get gun-shy about trying new ideas. Finally, not only are farms with strong lending relationships able to make more sound business decisions, they also are able to secure the lowest interest rates.
So what can you do to build credibility and improve your standing with your lenders?
Know your ratios. The best farming customers don’t just look at total volume of debt; they look at debt-to-asset and current ratios, which illustrate their leverage and solvency. Farms who think about debt this way and know their ratios inside and out are answering the banker’s questions before the banker even brings them up.
View your banker as a resource. The best farms out there leverage (pun intended!) their banker to get advice, especially around growth opportunities. Bankers live for working with individuals who are on top of their records, know their numbers and are ready to look at the next step for growth (because if you’re not growing, you won’t need them anymore!). It’s your job to put deals on the table. If you’re being offered to rent the next 80, crop share 160, or to buy out the neighboring farm down the road who is retiring, a banker can help you think through these, as long as you have tied your operational analytics to financials.
De-risk your operation by knowing your cost of production. Three years ago, a banker could take your taxes and operated acres, plug in university budgets and spit out a revenue projection that shows a 15% return to pay back debts with a nice margin of error. Those were the days. Today bankers expect you to have a plan and know exactly what it will take to execute. The farms I’ve seen do a good job leverage software like Granular to create field-level financial records and projections. The farms that do the best job plug these field-level projections into distinct scenarios and quantify the probability of each of these scenarios materializing. It’s difficult to do all of this in Excel or with pen and paper. Bob Boesdorfer from First Midwest Bank believes farm management software can make a difference for both parties: “It makes it easier for farmers to produce professional, accurate financial reports they need to show, while also making it easier for lenders to get a realistic view of the farm operation they are working with.”
Have a strategy. Debt in itself isn’t a bad thing. It can provide a solid avenue for growth when lack of owned capital can limit it. Be purposeful and have a plan that outlines why you’re borrowing money, not just how much. This will help you stay grounded during the good times and make sound decisions during the harder ones. Many of the struggles we’re seeing in today’s ag environment are because farms borrowed money simply “because they could” four, five years ago.
Be open. Adopting a transparent approach towards building relationships with lenders helps farms earn trust more quickly. Being upfront with bad news is better than the bank finding it out later, which will inevitably happen. Bankers can’t help unless they see everything: the good, the bad and the ugly of your farm. If you want them to help with the ugly, set aside your pride, show them the numbers and bring up the challenges you’re facing. The response might be surprising.
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