Previously, we discussed some of today’s top concerns amongst lenders and producers. Profits and cash flow made it to the top of the list with loss of experienced staff, and quality of information following close behind. Producers are looking for areas to tweak the business, juggle expenses and sell assets to maintain operations while others are talking about expansion and start-up businesses.
Returning to my interview and the questions from the software professional, another question he asked was, “What are the top two or three factors on a lender’s “watch out list” for high-risk producers?”
One phrase that may become familiar this loan renewal season is “trust, but verify.” Expect your lender to double-check information such as, a list of serial numbers on equipment. Lenders will want full disclosure on any liens or security agreements on various assets. In general, fraudulent activities are on the rise. Examples include placing security pledges on the neighbor’s cattle and grain disappearing from bins. This phrase “trust, but verify” will also apply to credit card debt. Some producers have utilized credit cards to pay down lines of credit in order to continue operations.
Lenders will assess current status and trends on working capital, core equity and land. Lenders will also calculate burn rates in order to test resiliency of the business. Specifically, they need to know how much time it will take to burn through the liquid assets or the excess equity in land.
Lenders will watch for positive behaviors. Is the customer proactive? Lenders will assess if producers are willing to include spouses and partners in crucial conversations. Have they developed a financial plan for long-term improvement? Many lenders will also need to assess the customer’s drive and attitude in moving forward. Good communication and positive behaviors can be extremely valuable from the lender’s perspective.
As producers, expect your lender to ask for cash flows with different production, price, cost and interest rate scenarios. In fact, producers should develop these scenarios even if not required because regardless of size or status, today’s farm businesses need to have a good grasp on financials.
Many producers may see their lenders more often for inspections or review meetings. Lenders may want to monitor your projected cash flow to actual. Remember that internal and external review teams and regulators will place more scrutiny on customer information. Expect review of your production prices and cost as well.
As we wrapped up the interview, we observed that some producers may perceive these additional actions from the “watch out list” as a penalty. However, in reality, following these practices in side-by-side work with your lender will likely improve your business and financial management, which is certainly a good result in today’s economic environment.