A lender, who was new to the field of agricultural lending, recently asked me a very relevant question. “How do I know if a financially stressed producer is committed to change in order to improve their financial situation?” The following are a few of my observations from over the years.
More than a refinance
For too many producers, the quick solution to financial difficulty is for their lender to refinance or restructure their losses from short term liabilities to long-term debt. While this is a solution, this often is only a commitment from the lender. Yes, the producer will be asked to provide more collateral, usually land. However, without a plan and commitment from the producer, this quick fix typically does not work in the long run. A refinance does not drill down to the heart of the problem, which in many cases is poor management.
If a producer avoids planning to change because they are “too busy,” this is a sure sign of lack of commitment. Producers will cite their time spent on their operation’s planning, working on day-to-day type activities, or harvesting as preventing them from developing a plan. Failing to prioritize is a sign of management weakness. A fully committed producer who is experiencing financial difficulty will carve out time to address the problem. This often requires time spent working side-by-side with the agricultural lender, a team of advisors, or consultants.
“Just give me more money so I can grow the business out of financial issues.” Remember, if the business is losing money, often growth will only exacerbate the issue. Farm businesses should get better before getting bigger.
A written plan developed by the business owners and stakeholders is critical. If living expenses are an issue, then a written living budget that is monitored is necessary. Cash flow projections that are intensely monitored are a critical element to success. The cash flow needs to be developed by the producer, not by the lender.
If educational programs are offered, do they attend? What is their level of engagement? Do they apply the concepts and principles from the seminar or the school to their business situation? These are only a few of the commitments that will be critical over the next few years to navigate the economic white waters.