By Peter Martin
Your head might still be wrapped around harvest, but for many producers, loan renewal time is just around the corner. Don’t wait until the last minute to start compiling the information your lender will need.
Use these six tips to increase the likelihood of a smooth, seamless loan renewal process:
1. Write an annual report of your operation. A good overview not only describes your operation’s performance during the past year but also highlights the opportunities and challenges you face. This document helps avoid misunderstandings among the chain of people who will review your loan request. I had a client who was quite surprised when his loan request was declined after a couple of weeks. Turns out he had communicated his operation’s information in a conversation, not in writing. By the time his loan request had been passed to the credit analyst and approvers at the bank, his request was skewed and error-ridden. A written report removes that trap. Even better, create the report electronically so it can be copied and pasted where needed in your lender’s chain.
2. Include pertinent facts. Describe the past year’s crops, yields, acreage or equipment purchases or sales, employee turnover, successes and failures. It’s even a good idea to provide an update on your family. Did a new child or grandchild join the clan? Don’t stop with the past year. Share your expectations for 2016. Will you retain or change crops? Buy land? Put up a grain bin or replace equipment? Increase your staff? Explain where your operation has been and where you want it to go.
3. Stress-test your projections. Your outlook should include input costs, projected crop prices and expected profit and loss. Beyond that, offer best-case, most likely and worst-case scenarios of expected revenues and expenses. All three “what if” projections should demonstrate your ability to repay the loan. If you have already forward-contracted 50% of your crop, show your lender you’ve taken steps to mitigate risk.
4. Provide quality, timely financials. Your loan request package also should include accurate, timely financial statements. Make sure your balance sheet reflects your assets and liabilities at true market value; don’t under- or overestimate. Double-check your income statement to ensure it gives a true accrual-based picture of what happened in the preceding year. I particularly like to see a cash flow statement. When paired with an income statement, it shows exactly where your money came from and where it went.
5. Invite your lender to your farm or business. At least once a year, invite your lender and, if possible, his or her approver(s) to tour your operation and meet your family and team. The truth is, it’s a lot more difficult to say no to a loan request once you’ve seen a person’s business in action.
6. Give yourself time. Don’t wait until a week before meeting your lender to get everything done. Allow eight weeks to complete your financials and annual report, so you have time to spare in case any challenges arise. Have the information ready in one package to give to your lender when he or she visits your operation.
All too often we hear lending institutions take too long to renew loans. The reason is simple: They’re working with information that’s incomplete, inaccurate, unclear or last minute. Should it really come as a surprise when your lender’s progress is slower than you’d like? This time around, streamline the process by following the tips I’ve offered. Remember, your bank is a significant stakeholder in your operation. They want you to succeed but need your help to do so.
This column is not a substitute for financial advice.