Impress your lender with good research, transparency
Farmers at the peak of harvest have a need for speed when it comes to getting crops out of the field. Yet when it comes to successfully renewing your operating loan this winter, experts say, it pays to slow down, perform a lot of research and tell your story well.
“They know the underlying data that’s driving the profitability of the operation and the changes that need to be made to help the operation continue to be at a viable level,” explains Joel Oney, vice president and manager of agribusiness at Heartland Bank of Ohio.
Beyond The Basics. Whenever possible, it’s good to present information to your lender before meeting in person, he says. Put as much of it into a digital format as possible so it’s easy to review on a computer. For the meeting itself, budget several hours so the conversation is as productive as possible.
“Nothing ever comes out exactly as you planned it,” adds Ashley Arrington, founder of Georgia-based ag consulting firm Agri Authority. That’s why it’s critical for producers to subject their budgets to stress testing and added safeguards that show lenders they’ve considered the consequences of financial choices.
Several factors can help producers prepare a winning portfolio for lenders, Arrington says.
Develop personal finance and balance statements. These serve as a check on working capital and equity. Break out equity within asset categories, Arrington advises, because lumping everything into the bucket of net worth can hide negative equity in equipment or other assets. If current assets are greater than current liabilities by a ratio of 1.5, you likely have a strong financial position. If the ratio is below 1, though, work is needed to bring the two into balance.
The best loan presentations have clear risk-management strategies with specific attention to the type and levels of crop insurance an operation holds and the commodity marketing plan it will act on, Oney says. “Do they know their cost of production so they can execute sales that will be profitable?” he asks.
Next, craft projections about how your operation will perform financially in the future. Stress-testing is part of this focus. Consider what will happen to your operation if commodity prices shift 5% to 20%. List break-even costs for each of the crops you grow or livestock you raise.
Then perform a lean analysis of fixed and variable costs. Review historical data to see where you tend to go over budget and set attainable goals for the year ahead.
“I’d rather set myself up to be pleasantly surprised,” Arrington says.
List debts to explain the terms of each loan, as well as your capacity to repay existing bills and take on new debt, to your lender.
Best Face Forward. Craft a narrative that helps lenders understand where your operation has been and where it is headed.
Make a point of going beyond the financials to include details on succession planning, community outreach and other projects that are shaping your farm operation and your community for the better, Arrington adds. “Your banker must write the narrative about your farm for auditors if you do not provide one,” she says.