Times might be challenging in the agricultural industry, but good things are taking place too. We all know increasing demand for food means farming is here for the long haul. Farmers and ranchers are looking to invest in technology, expand their operations and diversify.
Traditional lenders know this too, but they operate under a business model that requires they be right at least 98% of the time. Don’t blame your bank for being too conservative. If a farm or other ag-related business fits into this model, it can borrow at very low rates. On the capital spectrum, bank debt might be the most conservative, but it’s also usually the cheapest. Agriculture’s growing capital needs for expansion, diversification and other ventures are often deemed too risky for the institutions that currently serve the industry. At the same time, traditional lenders are reining in credit policy exceptions, making it tougher for farmers and ag businesses to increase their borrowings or even renew credit.
Agriculture’s future offers tremendous opportunity for capital providers outside of traditional financial institutions. Who are these alternative lenders? They are publicly traded firms, private companies, even individuals. They are flush with capital and looking for opportunities to make even more money. They don’t have many of the regulatory pressures of traditional banks. They are willing to take higher risks, which means their capital will come with higher rates. Alternative lenders focus less on historical performance and collateral and bring a more aggressive and open-minded approach to what’s possible, great ideas, strong management teams and new directions. We desperately need this kind of thinking and money at the table in the ag industry.
Every other industry has alternative lenders financing distressed and growing companies alike. I continue to be dismayed at the lack of alternative capital available to serve an industry where the long-term opportunities are indisputable. Adding to this confusion is the fact farm banks have outperformed other banks in the past few years. In other words, even in recent tough times, agricultural lenders have generally been more profitable than other lenders. Alternative lenders should be eager to fund the industry where the banks are making more money.
To be clear, I’m not just talking about financing distressed operations. The real opportunity for non-traditional lenders lies with progressive, growing and healthy farms eager to explore new ventures and need a different type of capital to get there.
The opportunity to connect agriculture with a new legion of financial providers is much needed and exciting. It’s time to make those introductions for the future of farming.