Forward Thinking, ‘No Surprises’ Are Keys to Lender Relationships


Communication is key

Maintaining good communication with lenders has become increasingly important as operating margins have tightened.

“Communication is key,” wrote Josh Williams, an Iowa farmer. “My lender and I always discuss alternatives and different ideas for upcoming years and production practices.”

“Discuss often what you are planning, and keep your lender as a partner in your operation,” advised David, who farms in Washington state. “Your lender has lots of information and wisdom on the financial side and can contribute strength for your operation.”

This advice comes from “Practical Wisdom,” a joint effort by Farm Journal and Farm Credit Services of America. In this project, experienced producers share lessons learned and insights gained for the benefit of today’s young and beginning farmers and ranchers.

Several operators wrote about the importance of lender communications.

“Make an effort to have frequent one-on-one interactions,” wrote Greg, an Illinois farmer. “Lenders don't like surprises any more than we do, so the quicker you interact in the case of a problem, the better.”

“Be honest and have accurate records,” advised Guy Mills Jr., a Nebraska farmer. “Accurate records will show a lender what has happened, but more importantly show how growth can happen. Invite your lender out to show what you are doing. Have no surprises.”

Critical Measures for Your Operation

When it comes to reviewing a customer’s financial standing, lenders keep an eye on several measures of stability. Rachel Mehlhaf and Greg Lund are financial officers and colleagues at Farm Credit Services of America’s office in Sioux Falls, South Dakota. They offered their perspective on the key metrics.

“Working capital is critical,” said Mehlhaf. “In the current environment where grain prices have turned down, a proper level of working capital allows a producer greater flexibility when profits are minimized or disappear.”

The operator’s net worth, or debt-to-asset or equity-to-asset ratios, are another measurement lenders assess, Lund noted. “This is important because the more of your asset base you own, the better you will be able to handle short- and long-term adversity,” he explained.

Know your break-even

Mehlhaf and Lund agreed lenders like to see the operation’s break-even levels. “Are you a low-, medium- or high-cost producer? Knowing break-evens enables a farmer or rancher to better market grain or livestock with confidence, cut expenses where possible, and plan future purchases,” Lund said.

Manage risk

The use of crop insurance to manage risk, and a written marketing plan, also are plusses in lenders’ minds.

“It is important to understand the risk protection that crop insurance provides and to enhance marketing skills so you can use advanced features to benefit your operation,” Mehlhaf said. “Having a written marketing plan you can revisit often helps take emotion out of your marketing decision-making process.”

Producers also should review the current structure of their debt. “Will the way your debt is currently structured serve your operation well into the future?” asked Lund. “Long-term interest rates are at historical lows. Locking in a low interest rate now can protect your operation for years to come.”

Evaluate the family’s standard of living

A final point is to evaluate the family’s standard of living and whether the operation can sustain current levels. “Understand that the amount of the personal draw that is sustainable can change from year to year,” Lund said. “Consider whether off-farm employment or diversification are required to meet living needs.”

A veteran Indiana farm operator offers some sound advice related to the producer-lender relationship.

“Tell the truth all the time, pay your bills on time, and have a cash reserve,” advised Max R. Sullivan. The best approach, he wrote, is to “have a modest lifestyle, a modest house, a neat farmstead, and a loving family.”