In 2018, FamilyFarms Group conducted some simple benchmarking using the operating loans of about 60 of our members. A variety of things stood that might be of help to you and your farm. Below are our key takeaways:
A stronger financial condition doesn’t necessarily mean a lower interest rate.
The lowest interest rate on the member loans we studied was 3.5%. However, some farms that were in noticeably stronger financial positions received much higher rates. Additionally, some farms with rates of 5.75–6% were in significantly stronger positions than others that got rates of 4.75–5%. Each lender has its own underwriting standards and processes. When looking at all of the loan information together on one page, however, the difference in the terms that lenders extended was merely noticeable in some cases and stark in others. This leads to the next key takeaway.
Don’t just take what your lender offers.
Several of the farm owners stated that they submitted their application packet without requesting any specific terms, and they simply accepted the rate and other terms that lender offered. In light of the first takeaway, you can see why this can be detrimental to farm owners. To get the best possible loan terms, you need to do two things:
- Request the terms you are looking for. Certainly, you must be reasonable in this request, but remember that you seldom get what you don’t ask for.
- Negotiate. Remember that nearly all lenders are for-profit entities, and as such, they are more concerned about what is better for their bottom line than what is better for yours. Consider what aspects of the loan terms are most important to you, and be prepared to make concessions on other terms that are lower priority for you. Depending on the size of your loan, a 0.25% or 0.5% lower rate could save you thousands or tens of thousands of dollars. Take to heart the phrase we’ve all heard a hundred times: “Everything is negotiable.”
Working capital is not as important as equity.
While underwriting processes and “pet metrics” vary from one lender to the next, one thing they seem to agree on is that a farm’s equity-to-asset ratio is more important than their working capital position. Another way of saying this is solvency is more important than liquidity. This makes sense because equity, which is typically used as collateral, reduces the lender’s risk. Member farms with poor—or even negative—working capital still received very good terms and rates on their operating loans because they had solid equity-to-asset ratios to back those loans. It’s best to be strong in both areas, but if you have to focus on one, go with equity.
It’s important to understand the true cost of vendor credit.
As a result of the current ag economy, more and more farms have been using vendor credit in recent years. While this sounds like a good strategy on the surface, farms that utilize vendor credit are likely paying higher prices—sometimes even list price. When you negotiate price, you can usually obtain a discount that exceeds the cost of an operating loan. So, it may be better to increase the size of your operating loan instead of using vendor credit.
Work with your loan officer.
By engaging in regular, open communication with your loan officer, you can gain a valuable advocate.
The loan officer makes your case to the loan committee.
The better the loan officer knows you, your operation, and the direction you want to take it and why, the better they can represent your point of view. Educate them so they can educate the loan committee on your behalf.
Talk with your loan officer regularly throughout the year—not just at application time.
If there is something negative to share with them, tell them early so you have more time to make any possible corrective moves. Be transparent and over-communicate with your loan officer.
If a junior loan officer is working with your loan officer, include them in your conversations.
Sometimes, you may find that a new employee is learning the ropes from your loan officer. Be sure to include them in as many of your conversations as possible because you never know when your loan officer may leave or retire, leaving the newer officer as your main contact.
Some loan officers are more experienced and knowledgeable than others. If your contact is on the lower end of that spectrum, help them. While most would agree that you shouldn’t have to help train the lender’s staff, you have an interest in helping the person who can help push your loan through. The bottom line is that you’ll benefit from making your loan officer your advocate. The better relationship you can establish with them, the better your odds of getting favorable terms.
At FamilyFarms Group, we work with farm operators to meet their goals. We offer financial analysis, tools, and training to help make your farm self-sufficient and financially solid. Click here to learn more, or click the link below to request a free needs assessment.