Times are getting tougher in the ag economy. Weather risks, price fluctuations, local and regional challenges, rising equipment and input costs, and the many unknowns that come with farming make it essential to secure your operating loan. The larger and more diverse your operation and the tighter your margins, the more pronounced this need becomes. Operating lines of credit are the life blood of many operations. Bank consolidations, changing lending policies, and the ever-evolving risks inherent in the agriculture industry are making it more challenging to obtain that operating loan.
Be prepared to prove you’re a good risk, even if you’ve worked with the same bank for years.
In today’s uncertain environment, getting an operating line of credit is not a certainty—even if you have a long-standing relationship with your bank. You need to be prepared to tell the story of your operation in a way that illustrates why you are a good risk and the kind of company the bank wants to do business with. This starts with consistent, standardized, timely, and accurate financial information. You can strengthen the validity of your financial information by working with a third-party accountant to prepare (compile, review, or audit) your financial statements. You should supplement these statements with appropriate footnotes, even if you are preparing them yourself.
Provide accurate cash flow projections.
To do this, you need a clear understanding of your farm’s financials, including key ratios, which you should provide to your lender. This information should support your projected cash flow for the coming year. The projected cash flow should be accompanied by a projected income statement and balance sheet. The cash flow will show the timing of income and payments for the covered period of time, and the projected income statement should use accrual accounting to support the projected balance sheet. This can be a tricky task with multiple crop cycles and a mix of commodities in play.
When preparing projected financial statements, you should utilize the same financial ratios you applied to your historical information. Consistency between the historical and projected numbers is important to lend validity to those projections. If your operation is growing or the economics of the business have changed to support a different projection than history would indicate, then you will need to spell that out in writing in the documentation you are providing.
Tell a coherent story of success.
You should always provide a narrative of the past year, indicating what has worked well that you will be continuing and identifying what has not worked so well and what actions you have taken to improve those results. These plans of actions should include all relevant information, such as
- Expected financial results
- Resources needed (people and assets)
- Changes in practices and responsibilities
- Monitoring and accountability needed to get desired results
Your plans need to be measurable and include timelines. You will not need to share all the details with the bank, but you should give a high-level overview to demonstrate you have a plan to get the results you project. The narrative summary should be concise and to the point but give enough detail that the reader can understand your plans and desired results.
This is a lot of information that needs to be packaged in a way that keeps the lenders interested in your operation, helps them understand your direction, leads them to believe you can deliver what you say, and assures them that you are a risk worth investing the bank’s money in.
FamilyFarms Group is a member-owned network of farmers and other agricultural professionals working to preserve the legacy of family farming in North America. Our financial consultants provide guidance to help members better understand, analyze, and manage farm finances.