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What Makes Bankers Nervous

April 7, 2010

Ag lenders agree that the bar has risen to qualify as a borrower. Equity requirements are increasing, the cost of renting money is rising, loan structure is tighter and lenders' attitudes are "trust but verify”—reporting requirements are also increasing. In an environment of tighter credit and cautious lenders, knowing how they think will give you an edge when the time comes to borrow money.

A panel of four ag lenders with 122 combined years of experience shared their thoughts at the 2010 Top Producer Seminar. The bankers discussed what they look for in a good lending relationship and the warning signs they watch for when a customer may be in trouble (see sidebar below).

John Blanchfield of the American Bankers Association listens for the telltale "sucking sound”—the sound of equity in the business being depleted outside the business. "That means nonproductive assets bought by someone without a healthy cash reserve,” Blanchfield said. Examples include too many high-tech toys and a condo in Cancun.

Bankers also watch carefully when a farmer suddenly introduces Junior as a business partner. "We expect the younger generation to come in, but with a transition period,” said Sam Miller of M&I Marshall & Ilsley Bank in Appleton, Wis.

Another red flag that makes bankers suspicious is when a farmer proposes a new line of business way outside his core strengths. Is this a well-researched opportunity or a sign of desperation?

Distressed Borrowers. Borrowers who cannot repay are distressed borrowers, said Curt Covington of Bank of the West in Fresno, Calif. "They often feel denial and fear. Reactions range from ‘It's not my fault'; ‘I don't want to deal with it'; and ‘I own the problem, but you need to fix it' to ‘I own the problem and I need to fix it,'” he said. "Clearly, we prefer clients who fit the last category.”

To avoid becoming a distressed borrower, the panel suggested communicating with all creditors, enlisting the help of experts on the front end of the situation and framing the situation from all perspectives, including financial, legal, social, emotional, personal and family.

It's important to take action on the problem and devise a plan that works, Blanchfield said. "If you are restructuring your debt, it must be in writing, achievable, executable and designed to return the business to viability,” he added.

Lastly, don't look back. "There is no sense in beating yourself up about the past; learn from it and look to the future,” said Roger Schlitter of Roger's Farm Financial.

Cash Is King. Manage your margins and build liquidity and working capital, the lenders suggest. "Working capital is king during periods of volatility,” Covington said. "Farmers have been too reliant on real estate equity as a backstop in the years past.”

The lenders recommend that producers have cash on hand equal to at least 20% of their operating expenses for the coming year. 

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FEATURED IN: Top Producer - SPRING 2010

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