Regular, candid contact makes a big difference in how your lender can help you.
Whether your farming operation is flush with profits or struggling with red ink, it’s always a smart idea to stay on good terms with your lender. Successful communication is critical. Here are three suggestions.
1. Pick up the phone.
Keep in touch with your lender on a regular basis. This doesn’t mean you need to call, email, text or drop in to visit him daily, but a short phone call goes a long way, says Marc Ehlers, a senior vice president and regional manager with Bank of the West.
“If things aren’t going perfectly, increase the frequency and make sure your lender is in the loop with what is happening in your operation,” Ehlers says.
The flip side is true as well: Know what your bank thinks of what’s going on in the industry. If you’re having difficulties cash-flowing, chances are your neighbor is as well, and your lender already knows.
What your lender doesn’t know is what you are thinking. How are the decisions you are making affecting your cash flow? Is your perspective of where the market is going the same as your lender’s? Let your lender know what your plans are going forward.
“Be sure your lender is informed with what is going on in your operation,” says Ehlers. “Lenders don’t like surprises.”
2. Show your lender realistic numbers.
Reporting requirements by lenders have increased significantly over the past three years. These likely include increased frequencies for position reports, financial statements and collateral inspections. These requirements were born out of both increased regulatory pressure on your lender. For the dairy industry, those requirements also stem from 2009’s financial downturn and overall performance.
When difficult times set in – as is happening with dairies today -- provide your lender with your updated cash-flow projection.
“Don’t send him something that shows milk and feed prices that aren’t attainable,” Ehlers says. “Send him a cash flow that you can support by historical or actual current information. If you have a negative cash-flow projection, how are you going to cover the shortfall? Do you expect your lender to cover it? Your feed supplier, local farmer, outside cash/investor? This makes a huge difference in how your lender can help you.”
If your farming operation hits a rough patch, what changes are you going to make to improve your operational efficiencies? Are there any that can be quickly accomplished? How does it change the overall performance of your operation? Provide your lender with something tangible that can be used to help him or her meet and support your needs.
Whatever you provide your lender shouldn’t be a surprise since you have been communicating verbally with him on a regular basis. You know your business better than your lender does. Provide him or her with accurate timely information. What you provide helps him or her be a better lender and you a better client.
3. Provide CPA-prepared financial statements.
Most of you can provide a snow storm of information about your operation that can overwhelm your lender. Most lenders are not corn growers, cotton producers or dairymen. If they were, why would they be lenders? They are trained to look at information in a systematic way, which enables them to compare and evaluate your performance relative to your past performance, current industry conditions and your peers.
To do that effectively, they require CPA-prepared accrual financial statements (review quality preferably).
“These financial statements are your communication method with your lender and his organization,” Ehlers says.
Since those financial statements are prepared according to a standard set of accounting guidelines, they are a valuable communication tool for your lender within his or her organization. This allows him to represent your operation in terms a decision maker will understand.
Since financial statements are the primary tool a lender uses to evaluate your operating performance, they should be accurate, timely and representative of what you have been communicating to your lender. A quality CPA firm can provide you with accurate, consistent, and timely financial statements that your lender will appreciate. With this level of reporting, you will recover in better financing. The CPA information you provide to your lender comes from an independent third party and validates the prior information/communication that you have provided on a more frequent basis.
As with the prior communication, make sure you understand the financial statements you are providing your lender. Spend the time to go over them with your CPA so you can answer most of the questions your lender will have about them.
“If you understand them and what the differences are between your information and your independent CPA financial statement, you will be ahead of the game,” Ehlers says. “Keep your communication conservative, consistent and pragmatic to keep a sound relationship with your lender.”