Business Matters: Top 10 Lender Considerations for 2015

Business Matters: Top 10 Lender Considerations for 2015

Whether you borrow little or rely heavily on borrowed operating capital, the fact remains that the closer your relationship with your lender, the more efficiently your financial engine operates. 

This year, livestock margins look promising while grain margins look fairly tight. For producers in either category, solid financial planning pays off every time. Based on interviews I have held with numerous ag lenders, here are the top 10 areas you should focus on while managing your business through 2015 and beyond.

10. Business Structure. Present your operation as a sophisticated business that is in constant communication with its loan officer. Provide updated business plans annually along with an analysis of year-over-year trends from your financial reports. 

9. Risk Management Plan. Ensure you have specific marketing targets for previous and upcoming years. A structured marketing strategy should be clearly explained as part of your plan and acted on with discipline. Are you using marketing tools to protect downside risk? Using crop insurance to its maximum and appropriate levels is key.

8. Overall Farm Efficiency. Review your approach to asset purchases. Do you maintain an appropriate investment level for the acres you farm, or do you have more equipment than you need? Determine labor cost per unit, per acre and per head. 

7. Interest Rate Management. Evaluate whether short or intermediate loans have variable rates of interest. Could you consolidate some of these loans at a low long-term fixed rate in order to free up working capital? Every operation should review its debt structure biannually. 

6. Outside Debt. Examine credit cards, recreational items, homes and other personal items carrying debt that can weigh down a farm’s ability to cash-flow effectively. Review outside principal and interest payments due by all owners of your operation.

5. Balance Sheet Consistency. Keep land values consistent year over year. In doing so, you’ll evaluate earned equity more accurately. The inflation of land values or other assets from one year to the next does not accurately demonstrate profitability. 

4. Balance Sheet Inventory. Be conservative with grain and livestock values. Use market-price levels that are consistent with your lender’s other clients. Ensure correct inventory volumes. 

3. Bank Examiners. Ag lenders are being flooded with auditors. The lessons of the housing market downturn have changed industry requirements dramatically. The more details and accuracy you can provide your lender, the better.

2. Cash Flow. More than ever, it is important to present an accurate prediction of your ability to cash-flow, good or bad. Consider providing your lender with a quarterly report that demonstrates updated flow requirements. Alternatively, simply be sure to adjust them in a timely manner.

1. Line of Credit and Working Capital. Low commodity prices, especially those facing grain producers, will increase the need for more operating cash. Understand your working capital position. Protect cash and invest wisely in inputs. Your equity position might be strong, but cash is king.

Feel free to contact me for more specifics. 

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