Fiscal Fitness: Keep Your Lender in the Loop

May 2, 2012 03:05 PM

With increased banking regulations, quality and timely information becomes a necessity.

With Marc Ehlers
* Extended comments in blue.
As the cycles in the dairy industry continue, we are facing a period of marginal or negative cash flows. Since 2009, communication with your lender has become even more important, both from your standpoint and theirs.
With increased regulations and scrutiny in the lending industry, quality and timely information become a necessity for your lender to be able to meet your needs.

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Here are three keys to successful communication with your lender.
Verbal communication. Keep in touch with your lender on a regular basis. This doesn’t mean you need to call, e-mail, text or drop in to visit him daily, but a short phone call once in a while goes a long way. If things aren’t going perfectly, increase the frequency of contacts and make sure your lender is in the loop. The flip side is true as well: Know what your bank thinks about what is going on in the industry. If you are 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 will the decisions you are making affect your cash flow? Is your perspective on where the market is going the same as your lender’s? Let your lender know what your plans are going forward. In short, make sure your lender is informed about what is going on in your operation; lenders don’t like surprises.
Numerical communication. As most of the industry knows, reporting requirements for lenders have increased significantly over the past three years. These include increased frequency of position reports, financial statements and collateral inspections. These requirements were born out of increased regulatory pressure on your lender as well as the overall performance of the dairy industry in 2009.
Given the difficult times we are in, you should provide your lender with an updated cash-flow projection. Don’t send him something that shows milk and feed prices that aren’t attainable. 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? Or your feed supplier, local farmer, outside cash/investor? This makes a huge difference in how your lender can help you.
What changes are you going to make to improve your operational efficiencies? Are there any that can be quickly accomplished? How would they change the overall performance of your operation? Provide your lender with something tangible that he can use to help meet and support your needs. Whatever you provide 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 with accurate, timely information. What you provide helps him be a better lender and you a better client.
Fiscal communication. Most of you can provide a snowstorm of information about your operation that can overwhelm your lender. Most lenders are not 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. Lenders require CPA-prepared accrual financial statements for your operation (review quality, preferably). These financial statements are your communication method with your lender and his organization. Since they are prepared according to a standard set of accounting guidelines, they are a valuable communication tool for your lender within his 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 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 financial statements that your lender will appreciate.
The CPA information you provide to your lender is from an independent third party and validates the prior information that you have provided on a more frequent basis. This level of reporting should yield better financing.
As with those prior communications, make sure you understand the financial statements you are providing to your lender. Take the time to go over them with your CPA so you can answer most of the questions your lender might have about them. If you understand the differences between your own information and your independent CPA financial statement, you are ahead of the game.
Keep your communications conservative, consistent and pragmatic in order to maintain a sound relationship with your lender.
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