As dairy farm balance sheets across the country continue to struggle, securing a line of credit could become more difficult in the coming months. “Today most bankers have never seen bad times before,” says Curt Covington executive vice president of agriculture finance for FarmerMac. He encourages farmers to think of their banker as a partner in their business. “It’s your business, but it’s your partner’s money,” he says. If you’re thinking about your banker as a business partner, you need to communicate with then accordingly. If you’re planning on seeking financing in the coming year Covington says there are four things you can do to make securing that loan easier and faster.
1. Get your financial house in order
You must provide your banker with quality and timely financial info. “Don’t be surprised to hear your banker say ‘we’re good to go this year, but we’re going to need better financial info next year’,” Covington says. The financial statement is a key form of communication between the lender and the borrower. You should also have the last 12 months of creamery statements ready for your banker according to Covington. “You know what the first sign of a problem on the dairy is? A smaller creamery check than the previous month or other dairymen of the same size,” he says. “There’s either a herd health problem or potential selling of cows.” Provide your banker DHIA or other testing reports. In addition a herd replacement cost worksheet is a great tool to provide your banker. “Cows are your biggest capital asset,” he says. “Replacing them either comes out of your cash flow when it’s $20 milk or our line of credit when it’s $16 milk.” Covington says these worksheets also give your banker an idea of whether you’re planning to grow your herd or stay the same.
2. Present a plan
“It’s your job to present a plan to your banker,” Covington says. “It’s not your banker’s job to come up with a plan.” Provide income projections and assumptions. If you’re planning on growing your herd, Covington says you need to tell your banker in writing with a herd growth worksheet. Notify your banker of all the capital purchases you plan to make in the coming year.
One of the most important things is to know your herd equity burn rate, Covington says. “Your herd equity rate is the amount of income you produce off the dairy minus the cost of operating that business,” he says. “In other words, if you’re generating a loss every month, how long would it take to burn through all that equity in your herd line?” Covington also recommends stressing assumptions to a breakeven point so you know how low milk prices can go before you’re below your cost of production.
3. Plan your ask
“Determine how much you need in your line of credit and then be able to justify it,” Covington says. Be prepared to ask your banker for the financing you need. Bankers don’t want to hear ‘I’ll take the same amount I took last year,’ he says. Also be prepared to discuss any equipment financing needs.
4. Follow through
Even if you provide all of the documents mentioned in this article, there’s a chance your banker will need more information. If that’s the case “make it a priority to get it done in a timely manner,” Covington says.