Low commodity prices and depressed farm incomes isn’t only stressful for farmers—it affects bankers and lenders, too. While looking for operating and other loans next year, recognize your banker’s concerns and find ways to alleviate their stress.
Chris Barron, director of operation and president of Carson and Barron Farms Inc., provides 10 examples of what keeps your banker up at night and easy ways to ease their concern.
- Growing lines of credit and principle and interest payments because in many cases fixed costs are up and cash flow is down. This will tie into many of their concerns. Be aware of what your capital requirements are moving forward. Let lenders know if you’ll need additional capital sooner than later—don’t surprise your lender.
- Projected versus actual cash flow, remember working capital reigns supreme. Don’t miss any expenses; make sure they’re all covered so you don’t need to get an advance later in the year.
- The federal examiners are looking at banks with more scrutiny than ever, so farmers need to make sure they’re providing the banks enough and appropriate information for those examinations. Ask the lender “is there any other information I can provide to make your job easier?” If you’re a good customer you’ll get better service.
- Balance sheet inventory volume and value. Double and triple check your inventory and be conservative on the value. The lender is concerned because commodity prices have been on the decline year over year, so ease their concerns by making sure inventories aren’t overstated.
- Bankers want consistency on the balance sheet for land and equipment value. Use the same methods for evaluating market value on your equipment and leave land values the same year over year. In a nutshell, measure earned equity. That equity doesn’t come from land value changes unless you’re going to sell the land.
- Your debt as a whole, personal debt and any farming partner’s debt. Track your debt and any additional debt that would have an effect on your farm. Be cautious, a best practice would be to keep debt consolidated in one place as much as possible to keep a real view of total debt. It might give you more leverage with your lender to get a lower interest rate.
- Interest rates and lines of credit in the long term. Consider refinancing over the long term to bring in additional working capital to the operation in case we have more challenging years. When it comes to locking interest rates versus variable rates—analyze what works best for your operation.
- Farm efficiency, how much land do you have versus equipment and what is your annual labor costs. Calculate the amount of equipment and labor investment you have on a per-acre basis, compare your costs to local experts or with a number your banker gives you in your area to see if you are in a reasonable cost range.
- Do you have a risk management plan? Make sure you have plans in place such as contingency plans for operational components, term life insurance policies where needed and an annual insurance review for liability coverage.
- How professional is your business? Ask your lender if there are things they recommend you do to become more professional. For example, do you have a written business plan, employee handbooks, standard operating procedures, etc. Shore up your business with a plan: do you have it in writing? This carries a lot of weight with a lender.
If you need loans for the 2017 season, earn your banker’s trust by addressing these concerns.