How to Partner with Your Lender
These are challenging times in the ag sector, especially for farmers who didn’t get in a whole crop this spring. You may need to reapply for financing. Whether it’s getting an operating loan to put in the new crop, getting financing for expansion, or just making it through a rough patch, there are things you can do to be a good lending risk.
We talked with Curt Covington, Chief Lending Officer for Farmer Mac, the federally sponsored agency that makes long-term ag loans to 700 rural and community banks.
“These are tough conversations to have, but the bottom line is, your banker’s going to want more and better information than when corn was $8,” Covington told us in an interview after he spoke at this year’s Farm Futures Ag Summit. “There’s nothing better than having a borrower who’s done the right things to put themselves in a position that makes them bankable.”
Listen to the full conversation here:
Covington says borrowers need to build trust with their ag lender in these ways:
1. Know your financial condition.
“Get to know your financial statements backwards and forwards. Don’t delegate ownership of your business to your accountant or CPA or a lawyer. You own the business; you also own the financials. There’s nothing more discouraging than a borrower who says, ‘Here’s my balance sheet and tax return. I need my operating loan.’ You can’t fix a problem if you don’t know what the problem is.”
2. Expect to share risk.
“Bankers view operating lending as a shared risk arrangement. A really bankable client will have 20% of operating expenses on hand in the form of cash or something that can be converted to cash inventory. The less working capital you have, the more the banker has to finance—and at some point, they get very uncomfortable because you’ve shifted all of the risk of success onto the banker.”
3. Explain your marketing.
“You learn a lot when you ask a farmer for a plan. In the last two years, there’ve been marketing opportunities—and farmers who are on top of the markets and understand their break-even points have actually done pretty well. We’re hearing that from rural community banks. Ask yourself, ‘At this price, can I earn some reasonable level of profit and living expense and continue to operate?’ instead of looking for the home run.”
4. Reduce costs and debt.
“Identify variable costs you can attack and reduce without impacting the overall performance of the operation. Many of those expenses are literally in front of you, including fertilizer, seed, and other inputs. [Also] Remember that leverage kills. Having too much debt is a real pain point. You always incur debt during good times. The problem is, you pay it back during bad times. The key to everything is to make and retain more profits.”
5. Build long-term solvency.
“Do you have earnings to pay back debt and sustain the business long-term? This isn’t a short-term business and we don’t fix things with a series of short-term solutions. We solve it with a long-term strategy for being profitable. Relying on the markets to fix your problems is not a solution. And, though land equity has remained strong, land values don’t pay the bills. Working capital pays the bills.”
6. Ask for advice.
“Many farmers find themselves in a position where they don’t know who to go to. I’d encourage producers to view their bankers as a financial engineer or consultant. They’re a great free source of feedback and they love sharing what they know. One of the best questions to ask is, ‘What’s it going to take to make me more bankable?’ Any banker worth his salt should be able to tell you exactly what will get you in a better financial position.”
For farmers beefing up their business practices, Covington recommends the free resources offered by the University of Minnesota Center for Farm Financial Management.
As you examine the bankability of your business, remember we’re here to help. Your ADM representative can provide a number of marketing strategies and ways to save substantially on fertilizer. Like your lender, we welcome your questions, and promise our best efforts to help you be more profitable.
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