Building an Effective Relationship with Your Lender

Plant the Seeds Now for a Successful Future

How well do you know your financial situation? How does this knowledge affect your working relationship with your lending partner(s)? Does the strength of this relationship matter?

You bet is does. Bankers/lenders form one of the cornerstones of the agriculture and agri-food industry. They have the dollars to help you finance expansions, market new products or help get you through difficult times.
 

Be Prepared

Whether it is the annual review meeting, a new loan request, or the decision to shop around for a new lender, it ’s always helpful to be prepared. When you are prepared, it provides the lender with some assurance that you take your business seriously.  Also, by being ready with the information needed to have the loan adjudicated in a timely manner, you are being respectful of the banker’s time. 
 
Make sure to:
  • bring your current tax return
  • bring the latest financial statements
  • update personal net worth statements for the owners of the farm (Include all assets and liabilities.)  Note: Off-farm assets and liabilities are also important as they can serve as sources of working capital.
If you’re meeting with your lender to discuss a new financing opportunity, bring key details of the purchase, such as the purchase price, what is being purchased (e.g., land, equipment, livestock) and the targeted closing date for the deal. 

How much debt can the farm afford?

Lenders use debt service coverage (DSC) ratio as one of the key metrics in looking at how much new debt  a client can take on. With agricultural clients, lenders often use a financial covenant that determines how the DSC ratio is calculated and the DSC ratio that must be maintained. It is common in agriculture for the DSC to be a minimum of 1.25:1. The DSC provides a kind of cushion to meet financial obligations in the financial year (in case something goes wrong, such as a loss of seeded acres due to bad weather or more expenses.
 
Lenders look at two common liquidity ratios— working capital and current ratio— to determine the financial strength of the farm. These two ratios can be easily calculated using information on the financial statement. 
 
  • Current ratio is calculated by current assets/current liabilities. The ideal current ratio is 2:1.  The higher the current ratio position, the stronger the financial position of the farm.
  •  The calculation for working capital is current assets – (minus) current liabilities. The amount of working capital will vary from one farming operation to another due to the management capacity, type of enterprise and time of year. 
 
NOTE:  It’s a good exercise to calculate the ratio on a quarterly basis to become familiar with the farm’s trend line.  Generally, the more working capital , the better the farm’s ability to meet its debt obligations.   

Risk Management Strategies

Agriculture is, by nature, a risky business with many factors to consider. It’s a good idea to share your strategies with your lender. Price volatility (unpredictable rises and falls in price) can have a huge impact on your bottom line.  An effective grain-marketing strategy will provide a solid revenue stream.
 
It’s also a good idea talk to your lender about strategies on hedging or forward-pricing, timing of grain sales, and the input side of the production equation.  Other management strategies to share with your lender are participation in programs like AgriInvest, AgriStability, Crop Insurance, and Western Livestock Price Insurance Program.  

Future Plans

Capital purchases are a critical part of planning for the future needs of the farm. A business plan is a good tool to use when discussing capital purchases and the timing of those purchases. Cash flow projections are also a vital part of an effective business plan.
 
When doing your projections of capital purchases, a good exercise to do is the “What If Scenario.”  (This is an informed prediction about how a future situation might be handled.) In the case of your farm’s future plans, the exercise could test the financial position at a future date to determine if the farm can carry the increased debt. The lender may be able to set up a reserve loan to help with a capital purchase at the annual review.  This would allow you to move quickly and take advantage of a deal, if one presents itself.  If you`re planning to expand in the future, take a good look at your existing, operating line of credit. Do you have enough or will you need to increase it to meet the cash flow needs of the business?   

Trouble on the Horizon?

Always be proactive. If you think something is wrong in the business, don’t be afraid to reach out to your lender. Whether it’s a concern about the farm’s financial position or your ability to meet an upcoming loan payment, call your lender and discuss the situation. Don’t wait until it ‘s too late. There are many options available ,such as making the interest-only portion of loan payments, setting up a temporary bulge on the operating line of credit or refinancing some or all of the farm’s debts.
 

Good relationships help in challenging times

A good working relationship with your lender is always important, but can prove to be even more so during difficult times. These relationships must be developed over time. If you are pro-active and stay in communication with your lender, it will help strengthen the working relationship.  If you have questions or need more information, contact your local Manitoba Agriculture office.