Profit Manager: Have a Lender on the Bench

02:08AM Feb 27, 2013
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Chris Barron

As we manage our farm business during volatile times, it’s more important than ever to manage risk. For the past several years, farmers have enjoyed strong profit margins in most sectors. However, over time high market prices tend to create high production costs. Margins are bound to tighten during the coming years.

Interest rates, land rents, ownership expenses, government intervention, variable production expense, equipment and energy will all pressure margins. As margins tighten, access to capital could become one of your largest hurdles. Strong working capital with the ability to manage cash flow will be an absolute for a lender to fund your operating line of credit.

"Margins are bound to tighten ... access to capital could become one of your largest hurdles."

The relationship you have with your lender and their trust in your management capability will also weigh heavily on access to capital. With the current conditions, most farmers have good cash flow and capital access; therefore, now is a great time to develop new relationships with potential lenders in case a change is needed down the road.

Ag lenders are flush with cash available for all sorts of on-farm needs. As the ag environment changes, lending requirements (loan size), regulations, banking focus and priorities will adjust. We must keep close tabs on our lenders, just as they are focused on the quality of our business decisions.

Bench Benefits. The breakup of a lender-farmer relationship is a two-way street. Let’s assume your lender informs you of an internal change and will no longer be able to meet the needs of your operation. What would your response be? If you had 30 days to transition to another lender, are you prepared? Do you have the proper documentation ready to present to another lender under short notice?

Even though switching lenders might be unlikely, working through the process and developing new relationships could open new doors. Time spent discussing possibilities with a different lender is a good business practice. Share your plans. Learn about interest rate opportunities and other possible benefits. Just as you shop around for machinery, it’s important to know what your options are when managing your financial health.

Transition is never easy. Having a "lender on the bench" in case you need to make a change will make the adjustment much less painful. I recommend having at least one if not two other lenders who have a complete and full understanding of your financial position. While building these relationships, you will refine your skills of putting together the proper information to acquire low interest rates with the best services in the industry.

Lead the Lender. Below is a list of topics to discuss and work through with your current lender. Once you have refined these with your current lender, it’s fairly easy to duplicate the information and sit down with a prospective lender.

1. Build a written strategic business plan that clearly defines your goals and business objectives for the next 3 to 5 years.

2. Communicate with your lender at least twice a year to review any changes or adjustments to this plan.

3. Discuss potential challenges up front in order to minimize the possibility of any surprises.

4. Review specific cash flow and margin projections to ensure an understanding of your financial position. Review short-, intermediate- and long-term loans.

5. Examine current interest rates and discuss options.

6. Analyze your current financial ratios.

7. Develop a "Plan B" in case your original plan would run into any significant challenges.

Having multiple lender options might be the key for your operation’s success if the agricultural economy were to experience a downturn. If something happens to your lender and you’re depending on their services, it’s nice to know that within days you could have a seamless transition to another lender.

Chris Barron is director of operations and president of Carson and Barron Farms Inc. in Rowley, Iowa. He is also a farm business consultant and the author of the blog "Ask a Margins Expert." To submit questions and comments, e-mail Chris at [email protected].