Expect more documentation requests from your lender in 2020
For decades ag lenders have spent time on farms verifying assets. As 2020 approaches and the farm economy continues to struggle, don’t be surprised if your lender does extra homework.
Today, banks verify all categories of the balance sheet, including accounts receivable and prepaid expenses, according to Dave White, partner-in-charge of Sikich’s agriculture services team.
As small farms become big operations because of consolidation, they require bigger lines of credit, but they don’t always have large-scale accounting practices in place.
“Lending institutions are trying to figure out how to get their arms around this because a $25 million operation in most industries already has GAAP-based financials. They have internal CFOs, so they have established procedures and financial statements,” White explains. “Farmers don’t always have that.”
To cope, banks are spending more time confirming collateral. This is done by what White calls a field exam or farm visit. It’s a specific set of procedures outlined by the bank and conducted by a third party.
“The purpose of a farm visit is to be sure collateral is there and the condition and value of it was stated accurately on the balance sheet,” says Ashley Arrington, founder of ag consulting firm AgriAuthority.
On-Farm Confirmations. A field exam is always specific to a section of the balance sheet the bank wants to verify, White says.
For example, he says, they will verify with a grain elevator that a farmer has grain stored there and the status of the payment.
Another area under more scrutiny is prepaid expenses.
“The lender wants to know those are really for next season’s crops,” White says. “We would confirm that with their fertilizer, fuel or seed company. We’d say: Here’s what the customer says they bought; can you confirm it?”
How to Prepare for a Field Exam
Use a field exam as an avenue to improve your financial statements. Take these steps.
- Keep current and accurate financials. Update your balance sheet (accounts receivable, current assets and debt changes) frequently, says Ashley Arrington, founder of AgriAuthority.
- Stay organized. “Good record keeping is essential,” says, Dave White, partner-in-charge of Sikich’s agriculture services team. Have available your lease agreements, settlement sheets, prepay contracts and records of what grain is stored where.
- Plan for the visit. Know where your equipment and other assets are and have a game plan for showing them around, Arrington says.
- Don’t take it personally. Banks trust their customers, Arrington says. Farming collateral is hard to track.