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Keeping your lender happy

01/01/2007


Successful businesses use a ‘team of advisors’ approach to managing their operations. Farms should be the same. One of the key team members, and particularly in agriculture where there is a significant amount of capital investment and leverage required, is the lender. Lenders have a vested interest in your business. They want you to succeed, because if you succeed, then they succeed. Having said that however, they are no different than anyone else. If someone owed you a large amount of money, you would want to know that it was secure and that you were going to have it repaid, probably with some interest added to compensate for the use of it.

By having a degree of control over a significant amount of the capital you use to operate your business, lenders can have a tremendous impact on the financial affairs and day-to-day operation of your farm. It’s very important to develop and maintain a strong relationship with your lender.

Know your situation better than your lender!
Knowing your situation gives you added confidence when approaching your lender. If you know it is a good plan, and if you know that you can handle the payments, maintain healthy balance sheet ratios and create a profit, you maintain some control in the discussion. You may be in a position to then negotiate a lending rate, or at least determine some of the terms to match the needs of your situation.

You should be more knowledgeable about your operation than your lender, and if you know your situation, you may be able to detect inaccuracies or misunderstanding in the lender's assessment of your situation that may affect terms, rates or even the possibility of securing the loan. At all times, you need to know where your operation is and this is especially important, where it is headed.

Use the lender for appropriate advice.
Although the lender wants to encourage as many potential clients as possible to do business with his or her institution, their ultimate loyalty is to their institution and to the institution’s bottom line. The lender is interested in keeping your account as profitable for the lending institution as possible, relative to the risk and time needed to manage the account. Therefore, from time to time and in certain situations, the lender's advice may not be from a 100% unbiased standpoint.

Identify problems that may exist in your operation, and have ideas for a solution.
It is extremely important to have spent time reviewing your financial situation, identifying problems when they exist, along with possible solutions, and informing the lender that you are actively attempting to rectify a negative or deteriorating situation. The alternative is to have the lender identify a problem and advise you of it. This does not give the lender confidence that you are managing your business. It is not up to the lender to solve your problems.

Try to think like the lender; try to pre-determine what his or her response will be.
Try to assess your business from their point of view. This will prepare you for your meeting with the lender, and will reflect positively on your ability as a manager.

Convey a professional appearance.
Make an appointment, be there on time, dress appropriately and make a knowledgeable presentation. Be polite, minimize chitchat and stick to business as much as possible.

Revisit projections. It is useful to know the financial situation of your operation at strategic times during the year (e.g. the end of each quarter), and compare your situation to the projections that were made at the beginning of the year. This will allow you to determine where shortfalls have occurred, and to take corrective measures; one of which may be to arrange some additional short term financing.

Use previous, actual cash flow to be the basis for projected cash flow requirements.
If your projections are based on actual historic costs, then they should be reasonable and should provide an excellent basis for projected cash flow requirements. Some operating costs are quite variable, but there is usually a pattern of payment (e.g. insurance premiums are paid in October).

Set targets that you can meet, and then beat them.
Lenders want to feel confident about a borrower and his business. If you can show that you are goal oriented, and have set and met goals in the past, the lender will gain confidence in your business and in your management. He or she will be more inclined to support your current goals and providing additional financing, when required.

Interest rates are tied to risk.
Farm operations, in general, enjoy lower interest rates than small businesses that possess the same amount of risk. A farm manager needs to know and understand the risk associated with his situation. Having a good understanding of your financial situation and how it compares with other operations, from an industry-based perspective, will aid in negotiating financing arrangements and interest rates.

Communication.
Open communication with your lender is always a good policy. As with any relationship, when communication breaks down, suspicion and mistrust may enter in. A major financial problem on your farm where you have excellent communication with your lender is nearly always more workable than a minor problem with poor communication. Put yourself in the lender’s shoes. It is generally understood that a lender will assume the worst in a situation where they do not have information. This is usually not in your best interests.

Some key points:

Covenants
If your financing arrangements state that you can not make capital purchases (sometimes there is a maximum, sometimes none at all) without approval of the lender, then make sure you get the required approval before you make the purchase. The covenant does not necessarily mean that the lender will not provide their approval. It does mean that the lender wants to know about your plans and have input into the decision. Although sometimes it may be difficult to understand, this is in your best interests.

Leases
Equipment leases should be treated the same as purchases. They have the same impact on leverage and working capital. They have the same impact on debt servicing capability of the farm business.

Capital budgets
It is very important to have developed plans for long term capital budgets (five years). Lenders, and other professional people associated with your business, such as accountants, need to know what your plans are for capital purchases in the future. Loans associated with capital purchases may be structured differently (different terms, maturity dates, security) given future plans.

Discuss proposed or pending purchases with your lender, in advance of making purchases.

Use annual reviews with your lender as a good opportunity to discuss capital budgets.

A financial institution is not obligated to deal with anyone.

It is very important to understand this. Trying to demand or coerce the lender to deal with you is never a good idea. You may find that your reputation has preceded you when you leave an institution and approach another.

A good working relationship with your lender is valuable.

A lender may be more apt to develop a new client than to renew a relationship with you, if you have proven to be a "high maintenance, low appreciation" client.

I’m in a financial crisis.

For many of us, it is human nature to tend to avoid dealing with potentially stressful situations and especially when these situations involve financial matters. However, it is far better to proactively work to find solutions than it is to procrastinate.

Most of the above points apply to situations where a degree of financial crisis exists. What’s different is the degree of intensity within a situation where a financial crisis exists. Make sure you use your ‘team of advisors’ … talk to them…get their input and their support and include your lender!

By Terry Betker, Director, Agriculture - Industry & Government. For more information, please contact your local MNP advisor or Terry at 204.788.6055.