Peter Martin: Healthy Borrowers Should Be Vigilant

November 6, 2017 01:58 PM
Peter Martin

While U.S. farms remain largely solvent, there are still plenty of reasons to be vigilant as loan renewal season approaches, even if your operation is in good shape.

Two tough years have eaten up working capital and equity resulting in an increased number of distressed borrowers. Farmers might be one of them. Lender patience with distressed borrowers is waning, and concerns about regulatory pressure are mounting. It is more critical than ever to talk with your lender—and sooner rather than later. You’ll need to arm yourself with good information and a game plan that shows how you’ll weather the storm and repay your obligations.

But even healthy operations should be thinking about renewals. Unfortunately, a few lenders are finding themselves in situations where they simply cannot extend credit, even to good borrowers, because of acute lending problems elsewhere in their portfolios.

That means both solid and struggling operations must exercise best practices for loan renewals. These fundamentals don’t change, but they are especially crucial for you to follow now.

Communication with your lender is critical. Share information both verbally and in written format about your operation’s status today as well as in the future. Start with a good overview of what has happened in the past 12 months. That means providing key financials, of course, but I urge you also to provide an annual narrative that tells the story behind the numbers. Your report should contain information such as the crops you grew this year and the crops you plan to grow in the coming year. Use this report to discuss recent and planned capital expenditures, major changes in your operation, key employee turnover and deviations from your budget. Be sure to include the positives as well as the negatives. A written report will ensure your farm’s numbers and description remain accurate and undistorted as they work their way through the multilayered lending chain.

Give your lender an idea of what to expect from your operation in 2018. That includes your crop budget and expected monthly cash flow. While there’s a lot of value in reporting this year’s results, your lender needs to know what to expect going forward. Because even the best laid plans can fail, put your projections through a stress test. What happens if prices fall from your projected levels? What if your expenses increase? Let your lender know you’ve thought through various scenarios and can still provide options that show how you will repay your loan.

Give yourself enough time to complete the refinancing process. Typically, people wait until the 11th hour to pull together the documents, numbers and thinking needed for a strong renewal request. In today’s environment, you could face any number of challenging surprises or even be forced to move to another bank for financing. If that happens, you are going to need as much time as possible. Eight to 12 weeks should be adequate if no land is being refinanced. If your credit needs require an appraisal, you should consider planning for three to four months to be on the safe side.

The stakes are high, whether you’re looking to survive or grow. The right approach with lenders can make all the difference in assuring your operation’s future.

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