Unless you have the kind of wealth we discussed in our previous article, how will you access the amounts of capital necessary to be competitive?
For many farmers, securing their operating loans can be a very frustrating and disappointing experience. As farmers farm more and more acres (see the articles on efficiencies gained through technology), operating credit increases accordingly. Add to that the historical volatility of inputs, land rents, etc. and you can have serious issues. The simple truth is that many producers are out-growing their lender’s and their own ability to handle their financial needs (in both dollars and mentality).
When that happens and the producer is looking for other sources of operating funds, where does he go? Other lenders? Investment groups?
In this article, we will address two issues: lenders and appropriate financial data.
Not all lenders are created equal. You have the obvious, such as size of the institution and competence of the individual lender (and, by the way, there is a significant spectrum of incompetence in the ag lending environment). I don’t mean to be unkind or disrespectful; it’s just that I have worked with too many lenders over my 50 years in the industry. The other, less obvious factors are things like their legal lending limit (lenders can only loan a certain percent of their capital to any one borrower and, in fact, there are usually two lending limits – the external regulatory lending limit and the internal board of directors’ policy lending limit. The internal lending limit for most lenders tends to be 50-60% of their legal lending limit.)
Another issue is the lender’s capital; as capital increases or decreases due to institutional profitability, contributed capital, loan losses, bank mergers, etc. It can often impact their ability to meet your needs.
Yet, another issue is changes in lending policy by the board. Boards often change the amount of credit they will make available to certain industries at different times. They often don’t tell you about this, either. Usually, they just say you need to find another lender or you’ve outgrown their lending limits or some other explanation.
You are entitled to understand the strengths and weaknesses of your lender.
All regulated members are examined and rated as to their financial health. If you want to know about your lender, you should go to this website and inquire. It will provide lots of information on your lender’s financial health. If you don’t understand the report, take it to your banker or another banker and have them explain it. You should know whether your lender is financially healthy or not. Not all are healthy, and your lender’s financial health often impacts their decisions.
By the way, your loan(s) are also classified by every lender. Lenders are required to set aside certain amounts of reserves; the lower you are classified, the more dollars they must set aside. Obviously, loans classified in the lower levels are less desirable for lenders. You should do whatever is required to move from a lower to a higher classification. I usually insist my lenders tell me how any loans I have are classified.
Now we will talk about appropriate financial data. We alluded to some aspects of financial data in the previous article. Let me get more specific in this portion. The larger you get, you darn well better get more informed about financials. When you were small, $1-3M, maybe it was all right to just do taxes at the end of the year and that was all you used your financials for. However, there are three reasons for financials:
- Tax or compliance. Other than staying out of jail and minimizing taxes, it has very little value.
- Credit. If you want the money, you have to play by capital’s rules.
- Management-enhancing profit.
Tax financials offer insignificant value as relates to management. Credit information offers a little more information, but not much. It is entity level data. Management data drills down into profit/ cost centers, and converts raw financial data into meaningful information such as $ per acre or bushels (production units) and/or performance metrics. For example, in crop agriculture, I have had for years what I call the “bottom rule.” What is it? You should not have more tractors than you have bottoms to put on them.
Equipment per acre is one performance metric. Other issues around financials are these: Your financial management counselor should not be your tax person, who may not be able to use data for profitability analysis. You need to have someone who understands financials from a profitability standpoint and can help you interpret and utilize the data.
You cannot and should not abdicate to others your responsibility for understanding your financials. This is an area where you should hire for competence and every month you should have a defined closing date and an immediate review. Anything less is irresponsible and shirking a management duty.
You must have knowledgeable and competent lenders with sufficient size and lending policies compatible with your needs. In addition, it’s your responsibility, not a bookkeeper you’ve hired, to be sure your numbers are accurate, consistent year to year with budget, and timely - nobody else, not a wife, not your child, not someone you’ve hired. It’s your responsibility. As you get bigger, that becomes more important. Like it or not, that’s the business world.
For additional information about capital access, please contact our consultants at AgriSolutions. Just call 618-372-7400. The next blogs in this series on consolidation’s megatrends will deal with structure: entity structure and personnel structure.