Alternative lending has had a bit of a bad rap in the past.
Alternative lending is a term for non-traditional methods or channels that finance businesses outside of the traditional finance system, such as banks.
The past decade has seen an increase in the number of alternative financing options designed to meet each farm operation’s unique needs. Even traditional lenders like banks and credit unions are getting more creative — and competitive — to attract and retain farm clients, offering longer loan amortization periods, interest-only payments and flexible repayment options.
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Curtis Grainger, Farm Credit Canada’s director of lending product and pricing, says that as a rule, farmers’ lending requirements still fall within the 80/20 rule.
“Eighty per cent of the time more standard options work for farmers, and then 20 per cent of the time they need more creative solutions to help match what their operation is trying to do,” he says. “For example, when a farmer is in the growth stage, cash flow is tight, and they need that cash to go towards growing their business. If they are a newer producer, their revenues are still growing and they need the cash flow to match their growing revenue stream. So, for maybe the first two to four years they are on an interest-only repayment schedule. Then when the business is more stable and able to make larger payments of capital and interest, they can switch over to that type of credit product.”
The point is that there are as many scenarios as there are solutions for financing the farm — and farmers are realizing they can shop around to find a solution that helps them achieve their goals.
“I think it’s the role of Farm Credit Canada and financial institutions to offer those flexible solutions because a lot of the time that is the growth opportunity for the industry, and is getting new people involved in the industry,” Grainger says. “It’s an important segment to nurture so Canadian agriculture can prosper and grow.”
Some things don’t change
Whether a farmer is approaching a traditional or alternative lender, the lender’s purpose is not to throw money at a business without doing their due diligence. The owner had better go in prepared with a sound business plan, realistic cash flow projections, and a solid understanding of the financial side of their business.
After that, it comes down to the amount of risk a lender is comfortable with. Alternative lenders have a higher risk tolerance than a conventional bank or credit union, which must adhere to stringent Canadian regulations. But that also means that alternative financing loans will be more expensive. Any private investor, whether an individual or a group, that is accepting more risk expects a decent return on their investment. Whoever is brokering the deal (e.g., a pension fund or private lending business) expects a profit on the transactions. And most alternative lending arrangements aren’t meant to be long-term.
How do you know it’s time?
For most farmers it’s hard to figure out when they are at the point where they need to seek alternative financing solutions. But it’s vital to not wait too long and to be honest about the reality of the situation. It can take a long time for a farmer to get to the stage where they simply can’t go any further with an existing lender — and it’s far too easy to keep muddling through with the hope that things will improve.
Warning signs might be that you are delaying bill payments, or you have a bunch of late payments and you’re selling the crop right off the combine because you need the cash immediately.
“That’s a sign you are in too deep, and you need to deal with your problem right then and there, otherwise it is likely to get a lot worse,” says Ric Luimes, credit manager and CRO at Glengarry Farm Finance, a small investment fund that offers short-term alternative lending options for farmers. “If you have another bad year, you are probably going to be selling off assets at that point and you may not be able to save the operation without some sort of liquidation. But if you are getting enough financing to do a restructuring and get rid of some payments — maybe equipment payments you could never afford in the first place — early enough, then quite often you can fix the problem. If you wait too long, it’s such a mess that it becomes impossible to fix and it compounds very quickly.”
Another acid test is when a farmer defaults on cash advance payments and no longer qualifies for the interest-free portion that is guaranteed by the government.
“Typically, you get zero interest on the first $250,000, but if you default on that, you are having to pay interest on any unpaid balance from the previous year, as well as paying interest on a new loan that you will need because you don’t qualify for the zero percent interest portion of the Advanced Payments Program,” Luimes says. “That spread in interest cost gets out of hand really fast.”
It can take anywhere from three to five months for a major bank to make a decision on a higher-risk loan, so there can also be a problem with farmers getting strung out while they wait — and then face going through the whole waiting game again with a different lender if the deal falls though. Luimes says if you are refused by one bank you are very likely to be refused by another because they must all follow the same rules. Getting declined by a bank might be an indicator that you should start thinking about an alternative lender.
Luimes says that the biggest trigger for a bank is when someone gets 90 days behind on any payment (or, as stipulated in Canada’s banking regulations, when they become a loan not in good standing).
“Once a bank is trying to move a client off their books, the sooner that happens the better,” Luimes says. “Many clients will try to drag this out hoping they have a good year, but more often than not end up with a lot of legal expenses and forbearance fees and still need to get a loan from an alternative lender or liquidate assets. The overall costs end up being much higher and they are on the alternative lender’s books far longer.”
“It’s really hard to identify where the point is that you need to step out to an alternative lender for a short period or restructure equipment payments or sell some assets, but if you need to do that, you need to act quickly,” Luimes says. “We see this all the time. Some clients could be on and off our books in less than six months had they phoned a year earlier.”
Don’t try and hide that you are looking elsewhere
All farms are different and have different needs, but in most cases seeking a new lender is not likely to happen without the co-operation of the existing one.
“One of the first things I ask farmers is, ‘Who is your current lender, and do they know you’re talking to me?’ And if they don’t, I ask, ‘Why not?’” says Josée Lemoine, vice-president of western Canada business development at Farm Lending Canada, a private investment fund specializing in alternative, short-term financing for farmers. “If a farmer is hesitant to engage with their lender, that can be a red flag. It’s important to remember that farmers can only take on so much debt from other sources before it starts affecting their overall financial health.”
When a current lender says ‘no,’ it’s often due to a specific reason. However, that doesn’t always mean it’s a barrier that can’t be overcome. For farmers, alternative lending can provide creative and flexible solutions, where traditional lenders might not see a path forward.
“Our goal is to ensure farmers have the financial tools to grow and succeed,” Lemoine explains. “We work closely with farmers to help them navigate challenging situations. We also make it clear to lenders that we’re not their competition, we’re here to keep the farmer’s business viable. If a farmer needs alternative financing, we collaborate with their lender to find a solution.”
“By exploring alternative lending options, farmers can access more flexible and tailored financial solutions that traditional banks may not offer,” Lemoine says. “These solutions are designed to address the unique challenges of the agricultural sector, from seasonal cash flow fluctuations to unexpected market shifts. With alternative lending, farmers can secure the funding they need to invest in equipment, expand operations, or navigate tough financial periods. The key advantage is that we understand the intricacies of farming and are committed to offering solutions that support long-term growth, helping farmers achieve their goals with fewer barriers.”
Am I in the right place?
Alternative lending, no matter how flexible and creative, is, sadly, not going to work for everyone. And for some farmers it’s a huge leap to even take that step, not knowing if it is something that’s right for them or their business.
“It’s important for it to be an intentional decision that fits into the overall business strategy,” says Lemoine. “In the absence of that strategy, it’s important to reinforce to the farmer what got you here. We don’t want to see you again, so what are you going to do to make sure that you’re going to change things so that you’re not here again?”
