The Bottom Line: Principles and Practices for Profit
WORKING WITH YOUR LENDER TO IDENTIFY OPPORTUNITIES
By Grant Griffith
In agriculture, the markets can be quite volatile, but every so often, this volatility can lead to opportunities. Today’s financial institutions are great resources for helping you identify these opportunities—but it’s important to understand your lender’s expectations.
What You Need to Know
Financial institutions help farmers identify good opportunities to pursue and which ones to avoid. They provide clarity on risk management strategies, ensuring that farmers have done their research in relation to each opportunity. A lender can also put into context the type of reporting system farmers should employ, and provide insight into the overall planning process for each opportunity. By putting all of these components into place, farmers have a greater chance of turning an opportunity into a long-term sustainable business operation.
Understanding the relationship between a farmer and a lender is important because this relationship can transform an opportunity from an idea into reality. However, there are important elements as well as red flags that a lender assesses prior to entering into a relationship with a farmer.
Red Flags for Lenders
A lender will have serious concerns if a business operation has a net worth of less than 30 per cent. Having more than five creditors listed on the balance sheet also raises red flags. In addition, if there are unexplained asset sales, unpaid property taxes or 60-day-old trade accounts payable, a lender will be cautious about entering into a relationship with a farmer. A lender also keenly observes a farmer’s ability to pay off the annual operating line, complete financial statements on time and will monitor if business losses are common for an extended period.
There are also telling signs of internal problems within a farming operation when the accountant knows little or nothing about the business operation, or creditors must call the bank to request payment. If a farmer introduces a lender to a new business partner, such as a son or relative, without a transition plan in place, this raises several questions about the effectiveness of the operation. On occasion, each partner of a farming operation requests a private conversation with the banker. This often demonstrates internal problems within the business and a lack of communication between partners.
The last thing a farmer wants is to become a distressed borrower—a client who can’t repay the loan from a lending institution as outlined in the lending agreement. If by chance you do find yourself in this position, you must maintain communication with your lender to the best of your ability. You will need to be proactive and enlist the help of an expert, and you may require legal advice. The sooner you do this, the better. These advisors will explore your options and assess the consequences and opportunities of where the business is heading.
Devising a Plan
Once you determine the best option, speak to your lending institution to devise a plan. As a farming operation, you may have a plan for success, but your bank is going to ask three specific questions:
- Is your plan achievable?
- How will you execute and implement this plan?
- Is this plan viable for a long-term solution and will it generate profits?
From a lender’s perspective, the key to creating a strong farming operation is to focus on liquidity. Build a strong balance sheet by gaining liquidity—then your equity can grow through long-term profitability.
For more business principles and practices, please contact Grant Griffith at 204-571-7665 or [email protected].