Ask a Margins Expert
Have a margins question? Through this blog, you will gain insight into improving your bottom line, as a margins expert answers questions and provides farm business advice.
Have a Lender on the Bench
May 16, 2011
As we manage our farm businesses during these volatile times it's more important than ever to manage risk. With high grain prices and the prospects of potentially wide profit margins we need to consider some of the potential challenges that may be hidden among what looks to be a time of great opportunity. One potential challenge that needs to be considered is the access of cash during volatile times. Cash access is currently not a problem for most producers, therefore, now may be the best time to develop some new relationships with potential lenders in case you need to make a change down the road.
Ag lenders currently are solid lenders, however, as time progresses things we cannot predict may change and adjust within our industry. As these changes occur, lending requirements, regulations, focus, and priorities can and will adjust. It's important that we keep close tabs on our lenders, just as they are focused on the quality of our business decisions.
Let's assume that your lender informs you of an internal change or adjustment and will no longer be able to meet the needs of your farming operation. In most cases this is unlikely, yet these questions need to be asked. What would your response be? If you had 30 days to transition to another lender, are you prepared to do so? Do you have the proper documentation prepared and ready to present to another lender under short notice? These are just a few considerations in the event you would need to make a change from one lender to another.
Even though switching lenders may seem unlikely, working through the process and developing new relationships may ultimately open some new doors of opportunity. Spending time discussing possibilities with a different lender, is just good business. Discussing your plans, interest rate opportunities, or other possible benefits from a new lender are always worth looking into. Just as you shop around for machinery or other supplies, it's just as important to have options when it comes to managing your financial situation.
Transition is never easy; therefore, by having a “Lender on the Bench” in case you need to make a change will make this adjustment much less painful. I would recommend having at least one if not two other lenders who have a complete and full understanding of your financial situation. During this process of building new relationships you will refine your skills of putting together the proper information to acquire lower interest rates with some of the best services in the industry.
Here is a list of discussion topics to work through with your current lender. Once you have these refined with your current lender, it's fairly easy to duplicate the information and sit down with a prospective lender and share this information.
1. Build a written strategic business plan which clearly defines your goals and business objectives for the next 3 to 5 years.
2. Be sure to have clear communication with your lender at least twice a year to review any changes or adjustments to this plan.
3. Discuss potential challenges up front in order to minimize the possibility of any surprises.
4. Review specific cash flow and margin projections to ensure a clear understanding of your current financial position. (Review: short, intermediate, and long-term loans)
5. Review current interest rates and discuss your options.
6. Discuss your current financial ratios.
7. Discuss Plan B in case your original plan would run into any significant challenges.
During volatile times having multiple lender options may be the key for your operation if the ag economy were to change. If something happens to your lender and you’re depending on their services it's nice to know that within a short period of time you could have a seamless transition to another lender.