How have farm finances changed in two generations? Part two

Becoming your banker’s dream client takes some planning and good questions

In last week’s post, I wrote about how the shifting landscape in ag over the past two generations has created a lot of change – especially in the area of farm finances and how the farm’s leaders manage those finances.

I mentioned that one of these areas is the way farm leaders are managing relationships with their lenders. Your banker is needing more information from you to give them confidence.

Related: How have farm finances changed in two generations? Part one

Lenders used to primarily focus on a farm’s equity, but are now placing a greater emphasis on working capital and cash flow. The banks they work for are dealing with increased regulation since the 2008 financial crisis. In many cases, they’ve tightened down and become more conservative in their lending practices.

Now and then
Back in grandpa’s day (as we talked about last week), if an operation had very high equity but was low on working capital, that would have been seen as acceptable. The banker may have recommended that the farm leverage some equity from the land, viewing the farm as having the hard assets to back it up.

Today, if a farm doesn’t have enough working capital to make everything cash flow, bank regulators often aren’t allowing lenders to make loans to those clients. And if the farm’s ground is already quite leveraged, then there may not be any wiggle room for collateral to collateralize your operating note. The bank might even say it’s time to find another bank – we can’t lend to you anymore.

Now is the time to be proactive about these changes. The first step is thinking differently about your farm’s finances. When you get ready to meet with your banker, prepare to show them all the ways you’re financially prepping your operation: Here’s how I’m gearing up to protect my operation. Here’s my plan to build my working capital.

Make your banker love you
Farmers that bankers love to work with will create and show the banker these types of plans – and both will reap the rewards of having a good lending relationship. The proactive farmer has an accrual financial projection put together, ahead of the meeting with the bank.

This farmer knows his numbers. He goes to the banker saying: ‘Here’s what I know isn’t quite right with my operation and here’s what I intend to do to fix it. Here’s the good outlook and the bad outlook. Here are my contingency plans.’

Ask your banker lots of questions. Think of the banker as an advisor to help you make your farm more competitive. Here are a few to start with:

•What are the top one or two things I could do to improve my operation’s position?
•What’s most important to you as you look at my farm’s financials?
•Looking at the current state of my farm’s financials, what financial aspects should I focus on in the next few months?

The right partners
Your banker isn’t there just to loan you money. You want a banker who will act as a partner, helping you continually improve your operation. Their insight can help you avoid an undesirable scenario, like suddenly having to go bank shopping.

Meetings with your banker aren’t anything to fret about. They’re an opportunity for both farmer and banker to get a better understanding of where the operation is at, and how money gets loaned out. Our ag finance advisors help farmer clients prepare for banker meetings, including helping the farm leaders put together accrual financial projections. If you’d like to discuss your farm’s situation, you can talk with an advisor here.

Read the new issue of the Smart Series publication, bringing business ideas for today’s farm leader. This issue features the story of a farm family who is working on a legacy plan to keep the farm in the family while maintaining family harmony, items to consider as you select an estate planning attorney for your legacy plan, and how to work toward increasing your operation’s efficiency. Get your free online issue here.

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