How to Ensure Your Banker Will Approve Your Loan

December 4, 2017 04:27 PM
Focus on maintaining quality financial data, having access to working capital, understanding farm leverage and creating a plan to get out of distress if necessary.

As the farm economy struggles to make a comeback, farmers around the country are likely to heavily rely on their bankers in 2018. How can you up the odds your loan requests will be fulfilled? Focus on maintaining quality financial data, having access to working capital, understanding farm leverage and creating a plan to get out of distress if necessary, experts say.

“The biggest hurdle I’ve seen in 22 years of being in the banking industry is lack of quality financial data coming from producers,” says Nick Stokes of Conterra Asset Management. Some lenders don’t have the courage to ask for better financial documentation from their borrowers, but in the current economic climate, not having solid data is not an option, he says.

In good years, bankers don’t worry as much about historical data related to marketing plans and cost of production, but in a year like the one ahead where commodity markets are expected to struggle, those data points are crucial, he says.

Money Keys. Cash is king, and the first financial metric every banker will look at is working capital, Stokes says. How much money do you have to spend during this year’s operating cycle? If you are projecting a loss, your lender will want to know what that loss will do to working capital.

Next, evaluate the degree to which your farm is leveraged. A farm’s debt-to-asset ratio should be at or below 50%, Stokes says. If it’s above 50%, your banker will want to know if you’ve got a plan in place to move back into a healthy range. “You're outside of the debt-to-asset parameter, which typically means you’re outside of the working capital parameter, as well,” Stokes says. “So it becomes a question of ‘OK, what's the plan to get that back?’”

Contingency Plan. Thirty percent of producers are experiencing financial distress, ag economist David Kohl says.  

“They are at the end of the pier,” Kohl cautions. Although he doesn’t anticipate the farm economy to improve for three to four years, there’s still hope for producers who find themselves in that situation. 

The worst thing you can do is ignore the problem, says Curt Covington of Farmer Mac.

“One of the things you can't do as a borrower is just sweep your problems under the carpet,” Covington says. “Quite frankly, there are a number of lenders out there that also tend to want to sweep problems under the carpet.”

Good lenders won’t give borrowers money if they don’t have capacity to repay it. Instead, if your farm is in a distressed position, it’s time to figure out if there’s a way out, Stokes says.

“The plan can't be, ‘We're just going to see where prices get me’ or ‘We're going to lower different costs or whatever it is,’” he explains. “It's got to be a viable plan to get the operation back within standards.”

It might take more than one year to recover, but with a solid plan in place, it’s not impossible.

What Kind Of Borrower Are You?

Farmers across the Midwest are preparing to apply for loans at the bank. Your borrower category will directly affect whether your loan is approved. On a recent episode of the “Top Producer Podcast,” Curt Covington of Farmer Mac outlines each type.

Category No. 1: Acceptable Credit Risk. “You’ve got plenty of cash flow, good collateral, good character, so on and so forth,” Covington says.

Category No. 2: Good Borrower With A Hiccup. A hiccup may require some kind of refinancing to improve liquidity. “There are a lot of growers in the Midwest that have had a hiccup given where current commodity prices are,” he says.

Category No. 3: Restructured Relationship. “The banker might say, ‘You know, we think that if we restructure the entire credit and restructure the balance sheet for this customer and help them out, they have a pretty good chance of returning to sustainable operations,’” he explains.  For the plan to be successful, the farm’s management team must prove they can execute the restructuring plan and be successful with it. “In other words, it makes sense in today's current agricultural economy,” he says.

Category No. 4: Total Workout Situation. This means the banker is attempting to work his or her relationship with a producer out of the bank to go somewhere else or potentially to go into foreclosure.

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