In farming, where access to adequate financing is key to success, lender relationships can’t be ignored. Nor can you neglect your approach to your annual review meeting with your lender. This is an important management function that needs focus. How can we best manage those relationships and your annual review for long-term positive outcomes?
“Lending transactions incur risk,” says Dennis Jones, branch manager, Servus Credit Union in Ponoka, Alta.
This supports the first principle that AME teaches in our finance modules; banks always get paid. Understanding how you manage in general (your skills) and how you manage risks (operational, financial, pricing, succession, and outside agreements) is key for lenders when making decisions on lending you money.
How can you help them better understand you and your business, and then better assess you in terms of risk? They may turn down loan applications when they aren’t comfortable with the risk they believe they are taking on.
First, the work starts long before the annual review. Lending depends on relationships, and it’s essential to start building and refining that relationship before you need that new loan for an expansion, not just when you arrive for your annual review. Sitting down and having a discussion early on about your business, your goals and intents, successes and challenges, gives the lender a background about what you do, who you are, and what kind of manager you are. Over time, it better defines the relationship between you and your lender. Better relationships yield better results.
Touch base two or three times a year. In order to understand what they are looking for, learn what financial ratios are important to your lender or if any of their policies have changed.
When considering changes or expansion, use your lender as a sounding board on the project before you ask for the loan. Use them as a member of your team in the project assessment.
As the relationship develops and loans are made, if troubles are looming, be proactive in communication. Talk to them before trouble hits, instead of reacting after the bottom falls out. This communication needs to be open and honest. The lender is in a much better position to help you before disaster happens than after. Remember, lenders don’t like surprises.
You’ve worked on communication to provide the background. Now it’s time for the annual review. What should you present?
- Bring your strategic and operating plan because your farm is unique. Providing a written plan is optimal. Share your vision for your operation, where you want it to go in the future, how will you get there, and what resources are required. Who are the key members of your team? How do you use them? Include staff, your accountant, agronomist, advisers or consultants, and mentors. Also include your knowledge about issues in your industry or marketplace that can impact your business.
- Share your projections. Being realistic, not idealistic in the values adds to your credibility.
- Include your financial statements. “It’s important to review and understand your financials before the meeting,” says Craig Guthrie, senior relationship manager, Business Banking, Servus Credit Union, Ponoka, Alta. “Areas of concern? Point them out. If an event or circumstance took place that had a significant impact on them, be clear on what happened, and how you will manage it differently next year.” Take the initiative. Understand the numbers and their implications before you get to the bank. Invest time with your accountant or adviser reviewing your statements and understanding your ratios. Demonstrate you have the financial knowledge and management skills required to assess needed changes.
- Discuss your succession plans and risk management strategies. Sharing these with your lender will give them assurance about farm viability and security as the farm is transitioned to the next generation or if there is a loss of a key member of the farm team. Is there key-man insurance, which is standard in businesses outside of farming, to provide resources to hire someone to replace a key position if they suddenly pass away? Do you understand the tax strategies, tax implications and financial resources of transition?
Management skills are key factors considered in a lender’s credit analysis. Demonstrate them. If you’ve taken some courses, let them know.
These suggestions are applicable for both your primary and secondary lenders. The larger the “ask,” the more work and detail will be necessary in the presentation. It’s about demonstrating your knowledge, ability, management skill, and yes, the numbers to help your lender become comfortable with the assessment and his risk in lending to you.
Heather Broughton is co-owner and president of Agri-Food Management Excellence.